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4/6 Options Cont'd

by: Emily Michel

4/6 Options Cont'd FIN 4424

Emily Michel
GPA 3.7

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About this Document

Futures and Forwards, and more on Options
Problems in Financial Management
Dr. Don Autore
Class Notes
financial management, finance, Futures and Forwards, Short-selling, Agency Problem, Incentives, options, Call, Put
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This 2 page Class Notes was uploaded by Emily Michel on Sunday February 14, 2016. The Class Notes belongs to FIN 4424 at Florida State University taught by Dr. Don Autore in Spring 2016. Since its upload, it has received 14 views. For similar materials see Problems in Financial Management in Finance at Florida State University.

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Date Created: 02/14/16
Fin 4424 Notes 4/6- Executive and Employee stock options -bonus/incentive to align interests with shareholders; reduce agency problem *Don’t work as well as expected, more decision making power for employees could be better, but for executives more decision-making authority allows manipulations of earnings, can make the stock look better… *Dilution: executives only have to pay 10/sh *(executives) Graph shows lowest point in stock price was where they claimed they granted the stock option *cant prove but probably granted at fiscal year end and placed the grant date at the lowest stock price. This is called STOCK OPTION BACKDATE, to get a more favorable strike price, so it wont cost the company *If granted in the money, it is basically like giving them a bonus -These options can be worth A LOT for the executives -CEO can be on board, swindle investors *Another graph shows large quantitiy of back dating or managers can predict market movement, Microsoft admitted to it. Grant in the money options but not expensing it to the company **Now the SEC requires one to report it within 2 days, can no longer have the advantage of hindsight -Can still backdate by two days… Put/Call Parity Stock+Put(right to sell)=B(risk free)+Call(right to buy) S + P = B + C -have to be with same comp. ; same strike price x; expire @same time; risk free matures at same time options expire, par=strike price s S+P x LP x s x x s B+C x x LC s x Synthetic Position: get payoff without buying S=B+C-P Ban Short Selling- what happens? -S=-B-C+P Short Selling = negative stock position, borrow shares you don’t own, you sell them and hope price falls and repurchase for cheaper. Like buying shorts example. Your friend buys a pair of shorts; you borrow them and then return them for cash. You hope they go on sale so you buy them at a cheaper price and give them back to your friend, so you hope to turn a profit. When short sells banned- option activity increased Example: Stock Price=50; P= $1.15; x= 45; rf= 5%; exp. In 1 yr. Call Price?? Answer: 50+1.15=B+C B= 45/1.05 or 45e^-.05(1) (continuous compounding)= 42.81 C=8.3 If don’t know either put or call use the Black Scholes model, which basically uses rocket science…(we wont need to calculate) th th CASE DUE 18 ! QUIZ Wednesday 13 : On Derivatives Futures and Forwards: Intuition Forward: btwn 2 people, ex. sell your car at 10000 to me next July Future: traded on exchanges, not 2 people, less counter party risk and safety measures Ex. Wheat Farmer: risk profile Baker risk profile Long Forward Short Forward Opposite. Use Forward Contract, Wheat sells, baker buys. Agree on wheat sale for in the future. Star= Cash Hedging the loss, eliminate risk for both, except if someone backs out


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