Tài chính doanh nghiệp - Chapter 15: Other derivative assets

© 2004 South-Western Publishing1Chapter 15Other Derivative Assets2OutlineFutures optionsPricing futures optionsWarrantsOther derivative assets3Futures OptionsCharacteristicsSpeculating with futures optionsSpreading with futures optionsBasis risk with spreadsHedging with futures optionsSpeculators and hedgingEarly exercise of futures options4CharacteristicsAre futures options “uniquely worthless”?Futures options give users of the futures market an enhanced ability to tailor their risk/return exposure to individual needsFutures options provide an opportunity for the speculator to avoid the potentially unlimited losses associated with futures contracts5Characteristics (cont’d)Futures options are relatively newNon-agricultural futures since 1982Agricultural futures since 1984Commodity Futures Trading Commission Act of 1974Futures options must not be “contrary to the public interest”Futures options must serve legitimate hedging purposes6Characteristics (cont’d)Futures options are no different from listed optionsFutures calls give the right to go longCall writer has the obligation to go short if the call holder exercisesFutures puts give the right to go shortPut writer has the obligation to go long if the put holder exercises7Characteristics (cont’d)The underlying security is the futures contract, not the physical commodity represented by the futures contractThe option holder decides if and when to exerciseExercise of a futures call does not result in delivery of the underlying commodity8Characteristics (cont’d)Futures PricesFebruary 10, 2004S&P 500 IndexOpenHighLowSettle ChangeMAR1138.301146.501137.601143.20+330JUN1137.001145.001137.001142.30+340SEP...1141.40+320DEC1139.001141.201139.001141.20+3509Characteristics (cont’d)Futures Options PricesFebruary 10, 2004S&P 500 IndexCallsPutsStrike PriceFEBMARAPRFEBMARAPR114011.6022.5030.208.4019.3027.9011506.6017.0024.8013.4023.8032.5011603.3012.6020.0020.1029.4037.6011701.459.0015.8028.2035.80.11800.656.2012.4037.40..10Characteristics (cont’d)Like other puts and calls, futures options have both intrinsic value and time valueExpirationThe option month refers to the futures contract delivery monthDepending on the commodity, the option may expire on a specific date in the preceding monthThe actual expiration date varies by commoditySome futures options have a serial expiration feature11Speculating With Futures OptionsSpeculation principles for futures options are the same as for equity optionsBuying futures options involves a predetermined, known, and limited maximum loss, just as with options on other assetsThe option premium is the most the option buyer can lose12Speculating With Futures Options (cont’d)Money At Risk Example In early September, a speculator anticipates lower demand for soybeans and anticipates a drop in the price of soybeans. She decides to buy a put option on soybean futures. Specifically, she purchases 3 APR 8300 puts at a listed price of 25.25 cents. The money at risk is3 contracts x 5,000bu/contract x $0.2525/bu = $3,787.5013Spreading With Futures OptionsUsed by speculators in futures options to reduce their money at riskE.g., construct a bullspread14Spreading With Futures Options (cont’d)Bullspread Example Consider MAR 8600 and 8700 calls on soybeans with settlement prices of 7 cents and 5 cents per bushel, respectively. The table on the next slide shows the profit and loss summary for a soybean bullspread.15Spreading With Futures Options (cont’d)Bullspread ExampleFutures Settlement Price (cents per bushel) 858860862864866Buy 8600 call @ $.07-7-7-5-3-1Write 8700 call @ $.05 +5+5+5+5+5Net-2-20+2+416Basis Risk With SpreadsIf the basis of two futures contracts underlying a long position in futures options and a short position in futures options are different, it is possible that both contracts will move against you17Hedging With Futures OptionsThere are as many ways to hedge with futures options as there are with equity or index optionsAny hedge serves to limit risk with some tradeoff in potential returnIn the commodities market, there can be several levels of hedging18Hedging With Futures Options (cont’d)Hedging Example William Bob operates a 1,500-acre farm in the midwest and plans on harvesting 50,000 bushels of soybeans. To hedge price risk, Bob could go short 10 soybean contracts, covering 50,000 bushels. However, to protect himself against unexpected problems with the crop (such as tornadoes), Bob could hedge by only going short 9 soybean contracts. This reduces the inconvenience and cost of having to either close out some contracts at a financial loss or acquire soybeans in the cash market to deliver against the short contracts. 19Speculators and HedgingFutures options are particularly useful to speculators of interest rate of stock index futuresIf a speculator buys an S&P 500 index futures contract, a market decline results in a reduced account balance as the contract is marked to market each dayPuts on the S&P futures would provide some protection against the potentially large losses20Early Exercise of Futures OptionsListed call options on equity securities or indexes will not normally be exercised earlyThis would result in an abandonment of the remaining time value of the option21Early Exercise of Futures Options (cont’d)With futures options, there are circumstances in which it is optimal to exercise a call earlyE.g., exercising a call allows the speculator to go long in futures and to earn interest with the futures contract22Pricing Futures OptionsFutures option pricing modelDisposing of valuable optionsFutures option deltasImplied volatility23Futures Option Pricing ModelBlack’s futures option pricing model for European call options:24Futures Option Pricing Model (cont’d)Black’s futures option pricing model for European put options:Alternatively, value the put option using put/call parity:25Disposing of Valuable OptionsThe holder of a futures option has three alternatives:Keep the optionExercise the optionSell the optionThe risk of holding onto the option is that prices may move adversely26Disposing of Valuable Options (cont’d)The early exercise of option is normally suboptimalDeep-in-the-money options have little time value and it is often advantageous to exercise them earlySelling the option has the merit of capturing the remaining time value and converts the intrinsic value to cash27Futures Option DeltasSlightly different from delta for equity or index optionsCall delta:Put delta:28Implied VolatilityImplied volatility is the standard deviation of returns that will cause the pricing model to predict the actual option premiumCalculating implied volatility must be done via trial and error29WarrantsCharacteristicsPricingHedging with stock warrants30CharacteristicsA warrant is a non-dividend-paying security giving its owner the right to buy a certain number of shares at a set price directly from the issuing companyWarrants are relatively rareTraded on the New York Stock Exchange, the American Stock Exchange, and Nasdaq31Characteristics (cont’d)Warrants are really long-term call optionsWarrants give the owners the right to purchase a set number of shares of stock directly from the issuing companyThere is a predetermined exercise price and expiration date32Characteristics (cont’d)Warrants pay no dividends and their owners have no voting rightsInvestors like them because they provide leverage and let them assume a bullish position with a low investmentWarrants can have very unusual exercise terms and conditions33Characteristics (cont’d)The vast majority of warrants are from small, relatively risky firms, often issued in conjunction with an IPO34PricingPrimary factor is the relationship between the price of the underlying common stock and the exercise priceWhen the stock price rises above the exercise price, the warrant is in-the-money35Pricing (cont’d) Actual Maximum warrant Warrant value price Minimum Price value Exercise price Stock price36Pricing (cont’d)The theoretical maximum price of a warrant is equal to the stock priceThe theoretical minimum value is the warrant’s intrinsic valueThe gap between the market price of the warrant and its minimum value is largest when the stock price equals the exercise price37Pricing (cont’d)New York Stock Exchange WarrantsFebruary 11, 2004IssuerSymbolExercise priceExpirationWarrant priceStock priceChiquita BrandsCQB$19.233-19-09$8.00$23.23Collegiate PacificBOO$5.005-26-05$5.15$10.05Image Ware SystemsIW$12.004-5-05$0.05$4.4038Hedging With Stock WarrantsA warrant hedge is similar to covered call writingWarrant hedging involves the warrant lenderAn investor buys shares of stock and simultaneously sell short warrants on the same companyTo short sell, investor borrows warrants39Hedging With Stock Warrants (cont’d)If the stock price is below the exercise price at warrant expiration, the warrants are worthlessShort seller owes lender nothing and keeps short sale proceedsLoss in value of the underlying stock is reduced by warrant proceeds40Hedging With Stock Warrants (cont’d)Warrants are exercised if stock price risesInvestor must repay the lender the loanInvestor’s profit is limited to the exercise price plus the proceeds from the short sale41Other Derivative AssetsForeign currency optionsWhen-issued stock42Foreign Currency OptionsForeign currency options began trading in 1982Commercial banks arrange most currency option tradingContracts guaranteed by Options Clearing Corporation43Foreign Currency Options (cont’d)Different from options on foreign currency futuresCurrency call gives you the right to buy the foreign currencyCurrency futures call gives you the right to go long the futures contract44Foreign Currency Options (cont’d)A foreign currency call is equivalent to a dollar put on the currencyThe contract size is one-half the size of the futures contractUnlike futures, options must be paid in full or a significant margin postedThe Black-Scholes model does not work well with foreign currency options45When-Issued StockThe NYSE permits investors to trade shares of stock issued in conjunction with a stock split even before new shares are distributed to existing shareholdersBoth the new shares and the old shares trade simultaneously46When-Issued Stock (cont’d)The old shares will go ex-distribution on the second business day before the date of recordPurchase after this date is a purchase with a due bill for the additional sharesHolders of the due bill are entitled to the new shares when they are issued