This reading provides a solid foundation and consistent knowledge base for understanding the key insights from options theory. It begins by developing terminology and a framework for understanding the contractual rights and obligations embedded in financial option contracts. The framework is used to map out the future cash flows (payoffs) associated with specific types of option contracts. Using the associated payoff functions, the value of an option contract is motivated as the present value of the option's expected future payoffs and is derived as the value of the portfolio of securities that would replicate those payoffs. The reading then examines how option contracts can be combined to provide specific desired payoffs (hedging). The reading shows how the Black-Scholes formula extends the framework. Discussion of the model includes intuition, insights about parameters, and numeric examples. Finally, several corporate finance applications are discussed, including accounting for the cost of employee stock option grants, understanding and valuing contractual terms of an acquisition offer, and determining an appropriate yield-to-maturity on new corporate debt issue.
- 2017 Harvard Business School Publishing - Higher Ed
- Book Quality:
- Harvard Business Publishing
- Date of Addition:
- Business and Finance, Nonfiction,
- Usage Restrictions:
- This is a copyrighted book.
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