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Good Afternoon 9/15. HW # 1 Posted – due Thursday, 9/22. We will also have a big quiz (on 9/22) – a double quiz – so after next Thursday, we will have three quiz / HW grades!

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good afternoon 9 15
Good Afternoon 9/15
  • HW # 1 Posted – due Thursday, 9/22. We will also have a big quiz (on 9/22) – a double quiz – so after next Thursday, we will have three quiz / HW grades!
  • Today – do exercise from last week on the goog 310 put, finish options; writing options, a zero sum game, and a profit loss function to see what is going on!
  • Introduce the futures market.
  • New posting – very important if you did not get hold of a guide to money and investing (warning, it’s a big pdf file)
  • Also, another posting, reading the stock pages and what is a PE ratio? An example.
reading assignment
Reading assignment -
  • Please read chapters 7 and 13
but first a couple pictures
But first, a couple pictures
  • Look for a bubble bursting????
the components of the dow jones industrials
The components of the DOW Jones industrials
  • Click Here for the components and Here for dogs of Dow
slide8

Now draw a profit – loss function for a randomly selected option (from BBY) – be sure to stress that we are only evaluating the profit / loss at expiration

writing calls puts
Writing calls: puts
  • When you write and option, you are giving someone the right to exercise the option that you write.
  • For example, suppose you own 100 shares of IBM stock and you are bearish.
  • You could write one call (say a 110 call) and sell it to someone – say for $50
  • If IBM never gets to $110, you simply keep the money (the premium).
  • If IBM does get “in the money,” say to $115, then you must honor the call you sold and sell 100 shares at $______
  • You are not happy – discuss difference between covered and naked calls (naked is more risky).
zero sum game
Zero Sum game
  • Show on overhead
example of writing a put bullish
Example of writing a put (bullish)
  • IBM spot is $100 as before – write one 90 put and sell for $50. If IBM never gets below $90, you simply keep the $50 premium.
  • Suppose IBM goes to $85 and option is exercised. You must buy 100 shares at $___
  • Difference between naked and covered put
  • A covered put is when you have established a short position on IBM
zero sum game1
Zero sum game
  • Show on overhead
now discuss options as a form of compensation
Now discuss options as a form of compensation
  • What’s the idea?
  • What’s the (possible) problem?
back to stock price determination
Back to stock price determination
  • Write down example on overhead
  • State assumption
  • Expectations of three successive years of profits: $ 5000, $12,000, $14,000
  • Expectations of 1 year interest rates: 3.5%, 5%, 5%
  • Calculate PV of firm
  • Assume 1000 shares outstanding – what is the price of stock?
  • What is the PE ratio?
  • See worksheet
introduce futures
Introduce futures
  • The wheat farmer and the bread maker – go to problem on web