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Options and Corporate Finance: Basic Concepts

Dr. Tufte's PowerPoint slides to accompany Ross et al.. 2. Chapter 22. Are option techniques limited to buying and selling options?22.1. Options22.2. Call Options22.3. Put Options22.4. Selling Options22.5. Reading The Wall Street Journal22.6. Combinations of Options. Dr. Tufte's PowerPoint sli

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Options and Corporate Finance: Basic Concepts

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    1. Dr. Tufte's PowerPoint slides to accompany Ross et al. 1 Chapter 22 Options and Corporate Finance: Basic Concepts

    2. Dr. Tufte's PowerPoint slides to accompany Ross et al. 2 Chapter 22 Are option techniques limited to buying and selling options? 22.1. Options 22.2. Call Options 22.3. Put Options 22.4. Selling Options 22.5. Reading The Wall Street Journal 22.6. Combinations of Options

    3. Dr. Tufte's PowerPoint slides to accompany Ross et al. 3 Chapter 22 Continued 22.7. Valuing Options 22.8. An Option-Pricing Formula 22.9. Stocks and Bonds as Options 22.10. Capital-Structure Policy and Options 22.11. Mergers and Options 22.12. Investment in Real Projects and Options 22.13. Summary and Conclusions

    4. Dr. Tufte's PowerPoint slides to accompany Ross et al. 4 22.1. Options Are you obligated to do anything when you buy an option? What is exercising? What is the strike price? What is another name for it? Do options expire? What is the difference between a European and an American option?

    5. Dr. Tufte's PowerPoint slides to accompany Ross et al. 5 22.2. Call Options What is this a right to? Are these more or less popular than put options? Does the firm that issues stock also issue options on its stock? How then can a firm offer options to its employees? 22.2.A. The Value of a Call Option at Expiration

    6. Dr. Tufte's PowerPoint slides to accompany Ross et al. 6 22.2.A. The Value of a Call Option at Expiration What two values can a call option take at its expiration (hint: one of these values is a difference between two prices)? What two names are given to these values? What sort of liability do you have with an option? What other assets share this sort of liability?

    7. Dr. Tufte's PowerPoint slides to accompany Ross et al. 7 22.3. Put Options What is this a right to? 22.3.A. The Value of a Put Option at Expiration

    8. Dr. Tufte's PowerPoint slides to accompany Ross et al. 8 22.3.A. The Value of a Put Option at Expiration What two values can a put option take at its expiration?

    9. Dr. Tufte's PowerPoint slides to accompany Ross et al. 9 22.4. Selling Options Is the seller obligated to do anything with an option? What does the seller get in return for this? What kind of game is options trading?

    10. Dr. Tufte's PowerPoint slides to accompany Ross et al. 10 22.5. Reading The Wall Street Journal Contracts for options are sold so that you have rights over how many shares?

    11. Dr. Tufte's PowerPoint slides to accompany Ross et al. 11 22.6. Combinations of Options Buying a put and a share of stock is called a what? What does it protect against? Do you get to keep any gains in the stock price? This can be duplicated by buying what? What is the relationship between these two possibilities called?

    12. Dr. Tufte's PowerPoint slides to accompany Ross et al. 12 22.6 continued What is a synthetic stock? Buying a stock and selling a call on it is called what? If the stock goes down, who bears the risk? If the stock goes up, who gets the gain? Why would someone do this?

    13. Dr. Tufte's PowerPoint slides to accompany Ross et al. 13 22.7. Valuing Options The difficulty with options is valuing them when? 22.7.A. Bounding the Value of a Call 22.7.B. The Factors Determining Call-Option Values 22.7.C. A Quick Discussion of Factors Determining Put-Option Values

    14. Dr. Tufte's PowerPoint slides to accompany Ross et al. 14 22.7.A. Bounding the Value of a Call What is the least that someone will pay for a call? What is the most the someone will pay for a call?

    15. Dr. Tufte's PowerPoint slides to accompany Ross et al. 15 22.7.B. The Factors Determining Call-Option Values Which should command a higher price, a call with a higher or lower exercise price? Which would be better, a call with a closer expiration date or one that is further away? The value of a call is most tightly related to the underlying price of the stock when the latter is what?

    16. Dr. Tufte's PowerPoint slides to accompany Ross et al. 16 22.7.B. continued Do call owners prefer more or less variability in the underlying stock? What about interest rates how do call owners benefit from having the right rather than the obligation to buy stock?

    17. Dr. Tufte's PowerPoint slides to accompany Ross et al. 17 22.7.C. A Quick Discussion of Factors Determining Put-Option Values Which factors behave oppositely for puts and calls? Which factors behave the same way for puts and calls?

    18. Dr. Tufte's PowerPoint slides to accompany Ross et al. 18 22.8. An Option-Pricing Formula What is the primary formula for pricing options? 22.8.A. An Option-Pricing Formula 22.8.B. A Two-State Option Model 22.8.C. The Black-Scholes Model

    19. Dr. Tufte's PowerPoint slides to accompany Ross et al. 19 22.8.A. An Option-Pricing Formula Why cant options be valued using net present value methods? Why cant we use the same old discount rate? The secret to figuring out how to price an option is to solve a problem that is what?

    20. Dr. Tufte's PowerPoint slides to accompany Ross et al. 20 22.8.B. A Two-State Option Model If a stock can take one of two values, the return on a call on that stock can be duplicated by doing what? What measure do we use to capture the relative risk of a call and a share of stock? Increases in this number indicate that which asset is getting riskier? How much do we need to borrow to duplicate returns?

    21. Dr. Tufte's PowerPoint slides to accompany Ross et al. 21 22.8.B. continued Does the value of an individual call depend on the underlying risk in the stock (this is different from whether the values of different calls behave differently when the risk changes)? Alternatively, the return on the stock is at least what other rate? Can we use this information to infer probabilities that the stock will go up or down? Can we use those to value the call?

    22. Dr. Tufte's PowerPoint slides to accompany Ross et al. 22 22.8.C. The Black-Scholes Model What is the Black-Scholes formula? What is the first term capturing? What is the second term capturing? Do individuals views of risk affect a call price? Does the expectation of the future value of the stock affect the call price? Does the current stock price affect the call price?

    23. Dr. Tufte's PowerPoint slides to accompany Ross et al. 23 22.9. Stocks and Bonds as Options Can you list some examples of other financial concepts that can be thought of as options? What is the name given to the field of studying things in this light? 22.9.A. The Firm Expressed in Terms of Call Options 22.9.B. The Firm Expressed in Terms of Put Options 22.9.C. A Resolution of the Two Views 22.9.D. A Note on Loan Guarantees

    24. Dr. Tufte's PowerPoint slides to accompany Ross et al. 24 22.9.A. The Firm Expressed in Terms of Call Options What kind of option is stock? So, buying stock is like doing what? In this sense, who owns the firm? What did the owners of the firm (in this sense) offer the stockholders?

    25. Dr. Tufte's PowerPoint slides to accompany Ross et al. 25 22.9.B. The Firm Expressed in Terms of Put Options More conventionally, who owns a firm stockholders or bondholders? Stockholders get what from bondholders? Stockholders insure themselves by getting the bondholders to sell them what?

    26. Dr. Tufte's PowerPoint slides to accompany Ross et al. 26 22.9.C. A Resolution of the Two Views What property tells us that viewing a firm as a call or a put are equivalent?

    27. Dr. Tufte's PowerPoint slides to accompany Ross et al. 27 22.9.D. A Note on Loan Guarantees If the government guarantees a loan, does it cost anything? What does it cost? Who benefits from a loan guarantee: If existing bonds are guaranteed? If new bonds are issued with a guarantee?

    28. Dr. Tufte's PowerPoint slides to accompany Ross et al. 28 22.10. Capital-Structure Policy and Options What problem characterizes managers choosing capital structure on behalf of owners? 22.10.A. Selecting High-Risk Projects

    29. Dr. Tufte's PowerPoint slides to accompany Ross et al. 29 22.10.A. Selecting High-Risk Projects Buying stock is like buying what sort of option on the value of the firm? Do option holders prefer risky or less risky alternatives? Therefore, stockholders will prefer which one? Is this good for bondholders?

    30. Dr. Tufte's PowerPoint slides to accompany Ross et al. 30 22.11. Mergers and Options In what two ways can the stock of a company be purchased for a merger? Which is riskier? What is the name given to a way in which this risk can be reduced? What form of option does it correspond to? How many of these are used? How do they differ?

    31. Dr. Tufte's PowerPoint slides to accompany Ross et al. 31 22.12. Investment in Real Projects and Options What are three increasingly sophisticated ways of viewing the outcomes of an investment project? The simplest method suffers because it assumes that what is constant throughout the project? How is viewing a multistage project as an option superior?

    32. Dr. Tufte's PowerPoint slides to accompany Ross et al. 32 22.13. Summary and Conclusions

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