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1、Lecture Presentation Software to accompanyInvestment Analysis and Portfolio ManagementSeventh Editionby Frank K. Reilly & Keith C. BrownChapter 21Chapter 21 - An Introduction to Derivative Markets and SecuritiesQuestions to be answered: What distinguishes a derivative security such as a forward, fut
2、ures, or option contract, from more fundamental securities, such as stocks and bonds? What are the important characteristics of forward, futures, and option contracts, and in what sense can the be interpreted as insurance policies?Chapter 21 - An Introduction to Derivative Markets and Securities How
3、 are the markets for derivative securities organized and how do they differ from other security markets? What terminology is used to describe transactions that involve forward, futures, and option contracts? How are prices for derivative securities quoted and how should this information be interpret
4、ed?Chapter 21 - An Introduction to Derivative Markets and Securities What are similarities and differences between forward and futures contracts? What do the payoff diagrams look like for investments in forward and futures contracts? What do the payoff diagrams look like for investments in put and c
5、all option contracts? How are forward contracts, put options, and call options related to one another?Chapter 21 - An Introduction to Derivative Markets and Securities How can derivatives be used in conjunction with stock and Treasury bills to replicate the payoffs to other securities and create arb
6、itrage opportunities for an investor? How can derivative contracts be used to restructure cash flow patterns and modify the risk in existing investment portfolios?Derivative Instruments Value is depends directly on, or is derived from, the value of another security or commodity, called the underlyin
7、g asset Forward and Futures contracts are agreements between two parties - the buyer agrees to purchase an asset from the seller at a specific date at a price agreed to now Options offer the buyer the right without obligation to buy or sell at a fixed price up to or on a specific dateWhy Do Derivati
8、ves Exist? Assets are traded in the cash or spot market It is sometimes advantageous enter into a transaction now with the exchange of asset and payment at a future time Risk shifting Price formation Investment cost reductionDerivative Instruments Forward contracts are the right and full obligation
9、to conduct a transaction involving another security or commodity - the underlying asset - at a predetermined date (maturity date) and at a predetermined price (contract price) This is a trade agreement Futures contracts are similar, but subject to a daily settling-up processForward Contracts Buyer i
10、s long, seller is short Contracts are OTC, have negotiable terms, and are not liquid Subject to credit risk or default risk No payments until expiration Agreement may be illiquidFutures Contracts Standardized terms Central market (futures exchange) More liquidity Less liquidity risk - initial margin
11、 Settlement price - daily “marking to marketOptions The Language and Structure of Options Markets An option contract gives the holder the right-but not the obligation-to conduct a transaction involving an underlying security or commodity at a predetermined future date and at a predetermined price Op
12、tions Buyer has the long position in the contract Seller (writer) has the short position in the contract Buyer and seller are counterparties in the transactionOptions Option Contract Terms The exercise price is the price the call buyer will pay to-or the put buyer will receive from-the option seller
13、 if the option is exercised Option Valuation Basics Intrinsic value represents the value that the buyer could extract from the option if he or she she exercised it immediately The time premium component is simply the difference between the whole option premium and the intrinsic component Option Trad
14、ing Markets-options trade both in over-the-counter markets and on exchangesOptions Option to buy is a call option Option to sell is a put option Option premium - paid for the option Exercise price or strike price - price agreed for purchase or sale Expiration date European options American optionsOp
15、tions At the money:stock price equals exercise price In-the-moneyoption has intrinsic value Out-of-the-moneyoption has no intrinsic valueInvesting With Derivative Securities Call option requires up front payment allows but does not require future settlement payment Forward contract does not require
16、front-end payment requires future settlement paymentOptions Pricing Relationships Factor Call Option Put OptionStock price+-Exercise price-+Time to expiration+Interest rate+-Volatility of underlying stock price+Profits to Buyer of Call Option4050607080901001,00050001,5002,0002,5003,000(500)(1,000)Ex
17、ercise Price = $70Option Price = $6.125Profit from StrategyStock Price at ExpirationProfits to Seller of Call Option405060708090100(1,000)(1,500)(2,000)(500)05001,000(2,500)(3,000)Exercise Price = $70Option Price = $6.125Stock Price at ExpirationProfit from StrategyProfits to Buyer of Put Option4050
18、607080901001,00050001,5002,0002,5003,000(500)(1,000)Exercise Price = $70Option Price = $2.25Profit from StrategyStock Price at ExpirationProfits to Seller of Put Option405060708090100(1,000)(1,500)(2,000)(500)05001,000(2,500)(3,000)Exercise Price = $70Option Price = $2.25Stock Price at ExpirationPro
19、fit from StrategyThe Relationship Between Forward and Option ContractsPut-call parity Long in WYZ common at price of S0 Long in put option to deliver WYZ at X on T Purchase for P0 Short in call option to purchase WYZ at X on T Sell for C0 Net position is guaranteed contract (risk-free) Since the ris
20、k-free rate equals the T-bill rate:(long stock)+(long put)+(short call)=(long T-bill)Creating Synthetic Securities Using Put-Call Parity Risk-free portfolio could be created using three risky securities: stock, a put option, and a call option With Treasury-bill as the fourth security, any one of the
21、 four may be replaced with combinations of the other threeAdjusting Put-Call Spot Parity For Dividends The owners of derivative instruments do not participate directly in payment of dividends to holders of the underlying stock If the dividend amounts and payment dates are known when puts and calls a
22、re written those are adjusted into the option prices(long stock) + (long put) + (short call) = (long T-bill) + (long present value of dividends)Put-Call-Forward Parity Instead of buying stock, take a long position in a forward contract to buy stock Supplement this transaction by purchasing a put opt
23、ion and selling a call option, each with the same exercise price and expiration date This reduces the net initial investment compared to purchasing the stock in the spot marketPut-Call-Forward Parity The difference between put and call prices must equal the discounted difference between the common e
24、xercise price and the contract price of the forward agreement, otherwise arbitrage opportunities would existAn Introduction To The Use Of Derivatives In Portfolio Management Restructuring asset portfolios with forward contracts shorting forward contracts tactical asset allocation to time general mar
25、ket movements instead of company-specific trends hedge position with payoffs that are negatively correlated with existing exposure converts beta of stock to zero, making a synthetic T-bill, affecting portfolio betaAn Introduction To The Use Of Derivatives In Portfolio Management Protecting portfolio
26、 value with put options purchasing protective puts keep from committing to sell if price rises asymmetric hedge portfolio insurance Either hold the shares and purchase a put option, or sell the shares and buy a T-bill and a call optionThe InternetInvestments OnlineEnd of Chapter 21An Introduction to Derivative Markets and SecuritiesFuture topicsChapter 22 Forward and Futures Contracts