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Pricing of Option

Pricing of Option

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Published by midhunjose_86

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Published by: midhunjose_86 on Mar 13, 2010
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01/17/2013

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Pricing of OptionsPricing of Options
Presented byPresented by John C. George 08PG0318 John C. George 08PG0318Mathew John 08PG0323Mathew John 08PG0323Midhun Jose 08PG0324Midhun Jose 08PG0324Nidhin SkariahNidhin Skariah08PG032608PG0326Raja Rakesh 08PG0331Raja Rakesh 08PG0331
 
Basic Concepts of OptionsBasic Concepts of Options
RelationshipRelationship
 
CallsCallsPutsPutsA > SA > Sin-the-moneyin-the-moneyout-of-theout-of-themoneymoneyA = SA = Sat-the-moneyat-the-moneyat-the-moneyat-the-moneyA < SA < Sout-of-the-out-of-the-in-the-moneyin-the-moneymoneymoney
A’ denotes the current price of the underlying assetA’ denotes the current price of the underlying assetS’ denotes the strike price of the optionS’ denotes the strike price of the option
 
A Transaction on an OptionA Transaction on an OptionExchangeExchange
Buyer
Buyer’sBroker
OptionsExchange
3
Buyer’s Broker’sFloor Broker
OptionsClearingHouse
Buyer’s Broker’sClearing FirmBuyer’s Broker’sClearing FirmSeller’s Broker’sFloor Broker
Seller’sBroker
Seller
1a 1bBuyer and seller instruct their respective brokers to conduct an option transaction.2a 2bBuyer’s and seller’s brokers request their firm’s floor brokers execute the transaction.3Both floor brokers meet in the pit on the floor of the options exchange and agree on a price.4Information on the trade is reported to the clearinghouse.5a 5bBoth floor brokers report the price obtained to the buyer’s and seller’s brokers.6a 6bBuyer’s and seller’s brokers report the price obtained to the buyer and seller.7a 7bBuyer deposits premium with buyer’s broker. Seller deposits margin with seller’s broker.8a 8bBuyer’s and seller’s brokers deposit premium and margin with their clearing firms.9a 9bBuyer’s and seller’s brokers’ clearing firms deposit premium and margin with clearinghouse.
1a6a7a2a5a
4
8a8b9a9b
2b5b1b6b7bNote: Eitherbuyer or seller(or both) couldbe a floor trader,eliminating thebroker and floorbroker.

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