Derivatives and options

6 important questions on Derivatives and options

What is a derivative?

A financial agreement between two or more parties, where the value is derived from an underlying asset, commodity or property

What is a future/forward agreement?

Derivative that is an obligation to buy or sell something in the future for a fixed price

What factors influence the value of options?

1. The exercise price
2. The amount of time till the maturity date
3. Price of the underlying asset (higher price = higher value)
4. Volatility of share price (higher volatility = higher chance that share price is different at maturity date)
5. Interest - (higher interest = more valuable to buy share at predetermined price)
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What is the lower bound of a call price equal too?

The market share price - present value of the exercise price

What is the put-call parity?

The relationship between the portfolio of a call option + a bond, and the portfolio of a put option + a share. It's:
price underlying asset + priceput = pricecall + PVexerciseprice

For what reasons may the call-put parity not work?

1. American options are valued differently, and the parity can only be used for European options
2. Numbers can be rounded during the calculation
3. Transaction cost can change the actual price form the calculated values

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