Options Valuation Exercises

Lindsey Matthews

30 years: Risk management & derivatives trading

In this video, Lindsey explains the application of the simple valuation model to value 4 options

Financial Markets

In this video, Lindsey explains the application of the simple valuation model to value 4 options

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Access this and all of the content on our platform by signing up for a 7-day free trial.

Options Valuation Exercises

3 mins 53 secs

Overview

To establish the model distribution you require the forward price and the volatility. The forward price is $1,000 and the 3-month volatility is 5%.

What is the value of the $1,000 call?

What is the value of the $1,000 put?

What is the value of the $1,025 call?

What is the value of the $1,025 put?

Key learning objectives:

Apply the simple valuation model to value 4 options

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Summary

What is the value of the $1,000 call?

First, calculate the payoff at expiry. Only the $1,050 and $1,100 bars are in the money, with $50 and $100 payoffs respectively.

Second, calculate the value at expiry by multiplying by its probability, which results in a value of $8.33 for both bars in the money, resulting in an overall value of $16.66.

What is the value of the $1,000 put?

First, calculate the payoff at expiry. Only the $900 and $950 bars are in the money, with $100 and $50 payoffs respectively.

Second, calculate the value at expiry by multiplying by its probability, which results in a value of $8.33 for both bars in the money, resulting in an overall value of $16.33.

What is the value of the $1,025 call?

First, calculate the payoff at expiry. Both the $1,050 and $1,100 bars are in the money and have a $25 and $75 payoff respectively.

Second, calculate the value at expiry by multiplying by its probability, which results in a value of $4.16 for the $1,050 bar and $6.25 for the $1,100 bar, resulting in an overall value of $10.41.

What is the value of the $1,025 put?

First, calculate the payoff expiry. Both the $900, $950, and the $1,000 bars are in the money, with $125, $75 and $25 payoffs respectively.

Second, calculate the value at expiry by multiplying by its probability, which results in a value of $10.41, $12.50 and $12.50 at each point respectively, resulting in an overall value of $35.41.

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Lindsey Matthews

Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.

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