Options - Finance Theory, MIT Lecture 10-11

15.401




15.401 Finance Theory
MIT Sloan MBA Program



Andrew W. Lo
Harris & Harris Group Professor, MIT Sloan School

Lectures 10–11: Options


© 2007–2008 by Andrew W. Lo

,Critical Concepts 15.401

ƒ Motivation
ƒ Payoff Diagrams
ƒ Payoff Tables
ƒ Option Strategies
ƒ Other Option-Like Securities
ƒ Valuation of Options
ƒ A Brief History of Option-Pricing Theory
ƒ Extensions and Qualifications

Readings:
ƒ Brealey, Myers, and Allen Chapters 27




© 2007–2008 by Andrew W. Lo Slide 2
Lecture 10–11: Options

,Motivation 15.401

Derivative: Claim Whose Payoff is a Function of Another's
ƒ Warrants, Options
ƒ Calls vs. Puts
ƒ American vs. European
ƒ Terms: Strike Price K, Time to Maturity τ




ƒ At Maturity T, payoff




© 2007–2008 by Andrew W. Lo Slide 3
Lecture 10–11: Options

, Motivation 15.401

Put Options As Insurance




ƒ Differences
– Early exercise
– Marketability
– Dividends



© 2007–2008 by Andrew W. Lo Slide 4
Lecture 10–11: Options