Financial ManagementLecture- Futures and Options Markets

1、Financial Management Lecture 8 - Futures and Options MarketsFinancial Management Lecture 8 -Futures and Options MarketsDr. TarikDriouchitarik.driouchikcl.ac.uk Office hours WBW4.08: Weds 4-6pm; email appointmentModule OutlineLecture 1. Context of Financial ManagementLecture 2. Bond and Stock Valuati

2、on* Lecture 3. Investment ApprapisalLecture 4. On Risk and ReturnspLecture 5. Cost of CapitaplLecture 6. Capital StructurepLecture 7. Dividend PolicyLecture 8. Financial Hedging and Instrumentse,pLecture 9. International Perspectives of Fin Mgt.Lecture 10. Behavioural Decision-making in FinanceeLect

3、ure 11. Wrap-up and Transition to Adv. Fin Mgt.2Learning Objectives Understand futures and options contracts Be able to compute profits and losses on futures positions Employ futures contracts for hedging purposes Understand the characteristics of call and put options Implement covered call and prot

4、ective put strategies3Hedgers vs. Speculators? Differences among: Hedging: locking returns to a constant level Insurance: protection again a negative outcome Speculation: betting on specific market directions Arbitrage: taking advantage of mispricing opportunities4Futures markets Chicago Board of Tr

5、ade ( CBOT) The first and largest commodities exchange In UK LIFFE Forward contract-agreement between two parties to buy or sell a commodity at a specific future time for an agreed upon price. Popular among producers, processors, and merchants Counterparty risk (producers unable or unwilling to deli

6、ver or buyers vanish) Futures contract: standardized agreement between two parties committing one to buy and the other to sell at a set price on or before a specified date in the future Margin: good-faith deposits to insure contract performance; Initial Margin: Minimum amount required to initiate a

7、trade; Maintenance margin: Minimum amount required at all times to sustain a market position; Margin call: when margin level is lower than maintenance margin 5Mark-to-market Daily settlement of gains and losses between buyers and sellers. If spot price rises, sellers pay buyers in cash for the chang

8、e in price If spot prices falls, buyers owe sellers If a futures trader loses too much, more money will be needed for the margin account.6Futures Contract Specifications -Example7Payoff for futures positions (long vs. short)8Sugar Futures Contract Commodity Trading -ExampleSize of the Contract112,00

9、0 lbsMinimum Price ChangeOf one ounce1/100 cents/lbOf one contract$11.20Initial Margin Level$700Maintenance Margin Level$500Day 1Investor sells 10 sugar futures contract at 5.29?/lb. (Position value = 10 x112,000 x$0.0529/lb = $59,248Investor deposits initial margin$7,000.00Price rises to close at 5

10、.32?/lb.; investor loss of 0.03?/lb. ($33.60 per contract) paid to clearinghouse-$336.00Account balance at end of Day 1$6,664.00Day 2Opening Account Balance (from Day 1)$6,664.00Price rises further to close at 5.40?/lb.; investor loss of 0.08?/lb. ($89.60 per contract) paid to clearinghouse$896.00Ac

11、count balance on Day 2, after loss is paid toclearinghouse$5,768.009Sugar Futures Contract Commodity Trading -ExampleDay 3Opening Account Balance (from Day 2)$5,768.00Price jumps to 5.52?/lb.; investor loss of 0.12?/lb. ($134.40 per contract) paid to clearinghouse$1,344.00Intraday account balance on

12、 Day 3, after loss is paid to clearinghouse$4,424.00Margin call of $2,576 made to restore theaccount to the initial margin level ($7,000)$2,576.00Account balance at end of Day 3, after the margin call is met$7,000.00Day 4Opening Account Balance (from Day 3)$7,000.00Price falls 0.05?/lb. to 5.47?/lb.

13、; investor gain of $56 per contract) $560.00Account balance$7,560.00Trader offsets the short futures position at5.47?/lb, and liquidates the account$7,560.00Account balance at the end of Day 4010Sugar Futures Contract Commodity Trading -ExampleDay 4Opening Account Balance (from Day 3)$7,000.00Price

14、falls 0.05?/lb. to 5.47?/lb.; investor gain of $56 per contract) $560.00Account balance$7,560.00Trader offsets the short futures position at5.47?/lb, and liquidates the account$7,560.00Account balance at the end of Day 40Profit/Loss SummaryProfit/Loss = 10 x (Contract Selling Price -Contract Buying

15、Price) = 10 x (112,000 lbs (5.29?/lb. -$5.47?/lb.) = -$2,016.00 (loss)Profit/Loss = Sum of Deposits (-) and Receipts (+)Day 1Initial Margin Deposit-$7,000.00Day 3Margin Call Deposit -$2,576.00Day 4Account Liquidated Receipt+$7,560.00Net Trading Loss-$2,016.0011Futures pricing Same asset trading in d

16、ifferent markets will have the same price Strict relationship between the price for underlying asset and related financial derivativeCommoditySpotCost of=+futures pricespricecarrySpot?Risk-freePercentage?=?1+?p?rice?interest ratestorage cost?FinancialSpot price forBorrowing costsDividend yield=+?fut

17、ures pricefinancial instrumentof carryor interest incomeSpot?Risk-freePercentage income on?=?1+?p?12rice?interest ratefinancial instrument?Futures pricing -ExampleThe spot price for a T-note: 105Annual risk free rate: 4%T-note s yield: 6% per yearDelivery month: in three monthWhat would you expect t

18、he futures price to be?Borrowing cost for three months: x 4% = 1%Interest income x 6% = 1.5%Futures price = 105x (1+0.01 0.015) = 105 x 0.995 = 104.47513Options Markets Derivative securities: value is derived or stems from changes in the value of some other assets. Total volume Billions contracts wo

19、rldwide The most popular options -equity options14Characteristics of Exchange Traded Options Four types of underlying assets Equity securities Stock indexes government debt securities foreign currencies Standardized terms Trading activity is determined by supply and demand Number of outstanding opti

20、ons called option interest15Options MarketsFigure 718.1 Trading Activity in Equity Options Contracts Has Risen Sharply1,600,000,000 Total Contract Volume1,400,000,000 Equity Options1,200,000,0001,000,000,000800,000,000600,000,000400,000,000200,000,000 Non-Equity Options0Source: Options Clearing Corp

21、oration16OOCCCC TToottaall YYeeaarrllyy CClleeaarreedd CCoonnttrraacctt VVoolluummee19731975197719791981198319851987198919911993199519971999200120032005What do we do with options? Option contracts are a zero sum game before commissions and other transaction costs Hedged position Option transaction t

22、o offset the risk present in some other investment (to limit downside occurrence) Speculative position Option transaction to profit from risk of some underlying 17What s an option? Financial options are options to buy or sell a financial asset e.g. BP share traded in an exchange Basic options are: c

23、all and put Buyer of an option gets the right but not the obligation to exercise the option Call option is an option to buy and a put is an option to sell One buys a call when expects the asset to increase in value and a put when the asset is expected to fall in value18What s an option? Strike price

24、 (or Exercise price): Predetermined or promised price for underlying asset At-the-money When strike price = current market price of underlying asset In-the-money When the strike price is less (more) than the market price of the underlying asset for a call (put) Out-of-money When the strike price is

25、more (less) than the market price of the underlying asset for call (put) Option premium Price at which the contract trades (the amount paid for the option) 19Payoffs to an option at expirationBuy call optionBuy put optionExerciseExercise0pricepriceP0rice of OPunderlying assetOPGains from holding a c

26、all Gains from holding a put option are unlimitedoption are limited by the exercise price20ProfitProfitIllustration of value of a call at expiry Suppose you buy a call on a BP share with time to expiry of 3 months, strike price of ?5 and at 3 months BP sells at ?6 the profit made by exercising the o

27、ption at that time is ?1 If you bought the call for say ?0.75 (the option premium) the net profit is = ?6 -?5 -?0.75 = ?0.25 (ignoring time value of money) If at 3 months BP sells at ?4 the loss is only ?0.75. You will not exercise the option For a call upside potential is unlimited but the downside

28、 risk is limited to the option premium21Value of option at expirationThe value of an option at expiration is a function of the share price and the exercise priceEg. Value at expiration of an option with an exercise price of 85pShare price60p70p80p90p100p110pCall option00051525Put option2515500022Cal

29、l and Put Options Quotes and Volume on Microsoft, CBOEMSFT26.93-0.04Mar 05, 2006 18:27 ET (Data 15 Minutes Delayed) Bid26.93Ask26.93Size14x146Vol45234151CLast allsNpen PLastetB idAskVOolutsNetBidAskVOpen olSaleIntSaleInt06 Mar 22.50 06 Mar 22.50 04.500667(MSQ CX60pc4.4-E4.)(MSQ OXpc00.05-E0.050110)0

30、6 Mar 25.00 06 Mar 25.00 15+0.101.952.004714613(MSQ CJ-E2.)(MSQ OJ-E0.05pc00.05017347)06 Mar 27.50 06 Mar 27.50 +0.78795800.650.600.7088316534(MSQ CY-E0.10-0.050.1525)(MSQ OY-E)1006 Mar 30.00 06 Mar 30.00 -.05023610(MSQ OK03.003.202785-E2.9(MSQ0.05pc00 CK-E)0.2006 Apr 22.50 06 Apr 22.50 04.60013679(

31、MSQ DX60pc4.5-E4.)(MSQ05pc00. PX-E0.05035081)06 Apr 25.00 06 Apr 25.00 03057696(Mpc0.050-E0.10.10049933(MSQ DJ-E2.15-2.102.2)SQ PJ)06 Apr 27.50 06 Apr 27.50 +0.50.40461147305(MSQ DY-0.050.3-E0.350.800.750.85128)(MSQ PY34125-E)0506 Apr 30.00 06 Apr 30.00 .05pc00.0501153658pc3.003.100670(MSQ DK-E0)(MS

32、Q PK-E3.0)Option style and settlement Option holder-long the option position Option writer-short the option position Style American style option-exercised at any time European style option-only exercised on the expiration date. Delivery Physical delivery option-actual delivery of the underlying asse

33、t takes place Cash-settle option-cash payment based on difference between exercise price and current determined price of the underlying asset Contract size-usually for 100 shares of stock24Option types Stock Options Generally cover 100 shares of underlying securities. Adjustment made for stock divid

34、end, stock split, merger, etc. Index options Standard and Poor s 100 Index (OEX) are the most actively traded Debt Options Options on bonds Yield based options: cash settled based on the difference between the exercise price and value of an underlying yield25Call option strategies Long position Nake

35、d call Bet on upside, mispricing or value investing Short position Payoff mirror image of long position Bet on weak fluctuations Covered call Sale of a call option on a stock that is owned Insuring proceeds from call premium26Call option strategies 27Call option strategies 28Put option strategies Lo

36、ng position Bet on price drop Expect a negative event Short position Mirror image of long position Capitalizing on premium Protective put Insurance against a sharp correction. Purchase of a stock and put option 29Put option strategies30Put option strategies31Other strategies Spread Both buyer and wr

37、iter of the same type of option on the same underlying asset Price spread-purchase or sale of options on the same underlying asset but different exercise price Time spread-purchase or sales of options on the same underlying asset but different expiration dates Bull call spread Purchase of a low stri

38、ke price call and sale of a high strike price call Bull put spread Sale of high strike price put and purchase or a low strike price put 32Option pricing Factors contributing value of an option price of the underlying stock time until expiration volatility of underlying stock price cash dividend prevailing interest rate Intrinsic value: difference between an in-the-money option s strike price and current market price Time value: speculative value.Call price = Intrinsic value + time value 33Option pricing34Black-Scholes Option Pricing ModelCallValue of Opportunity cost=?