【正文】 e see that the value of a call is lower when the exercise price is higher. This makes sense, because the right to purchase a share at a lower exercise price is more valuable than the right to purchase at a higher price. Thus the January expiration IBM call option with strike price $130 sells for $ whereas the $135 exercise price January call sells for only $.84. Conversely, put options are worth more when the exercise price is higher: You would rather have the right to sell shares for $135 than for $130, and this is reflected in the prices of the puts. The January expiration put option with strike price $135 sells for $, whereas the $130 exercise price January put sells for only $.p. 671Figure s profit would be $ ? $ = $. This is a holding period return of $$ = .461, or %—over only 44 days! Apparently, put option sellers on December 2 (who were on the other side of the transaction) did not consider this oute very likely.Example A put option The right to sell an asset at a specified exercise price on or before a specified expiration date. gives its holder the right to sell an asset for a specified exercise or strike price on or before some expiration date. A January expiration put on IBM with exercise price $130 entitles its owner to sell IBM stock to the put writer at a price of $130 at any time before expiration in January even if the market price of IBM is less than $130. While profits on call options increase when the asset increases in value, profits on put options increase when the asset value falls. A put will be exercised only if the exercise price is greater than the price of the underlying asset, that is, only if its holder can deliver for the exercise price an asset with market value less than the exercise price. (One doesn39。Example but if the stock price is less than the exercise price at expiration, the call will be worthless. The net profit on the call is the value of the option minus the price originally paid to purchase it.Trading of standardized options contracts on a national exchange started in 1973 when the Chicago Board Options Exchange (CBOE) began listing call options. These contracts were almost immediately a great success, crowding out the previously existing overthecounter trading in stock options. Option contracts are traded now on several exchanges. They are written on mon stock, stock indexes, foreign exchange, agricultural modities, precious metals, and interest rate futures. In addition, the overthecounter market has enjoyed a tremendous resurgence in recent years as trading in customtailored options has exploded. Popular and potent tools in modifying portfolio characteristics, options have bee essential tools a portfolio manager must understand.Chapter20: Options Markets: IntroductionChapter OpenerPART more simply derivatives, play a large and increasingly important role in financial markets. These are securities whose prices are determined by, or “derive from,” the prices of other securities. These assets are also called contingent claims because their payoffs are contingent on the prices of other securities. Options and futures contracts are both derivative securities. We will see that their payoffs depend on the value of other securities. Swaps, which we will discuss in Chapter 23, also are derivatives. Because the value of derivatives depends on the value of other securities, they can be powerful tools for both hedging and speculation. We will investigate these applications in the next four chapters, starting in this chapter with options.t need to own the shares of IBM to exercise the IBM put option. Upon exercise, the investor39。An option is described as in the money In the money describes an option whose exercise would produce profits. Out of the money describes an option where exercise would not be profitable. when its exercise would produce profits for its holder. An option is out of the money Out of the money describes an option where exercise would not be profitable. In the money describes an option where exercise would produce profits. when exercise would be unprofitable. Therefore, a call option is in the money when the asset price is greater than the exercise price. It is out of the money when the asset price is less than the exercise price。Standardization of the terms of listed option contracts means all market participants trade in a limited and uniform set of securities. This increases the depth of trading in any particular option, which lowers trading costs and results in a more petitive market. Exchanges, therefore, offer two important benefits: ease of trading, which flows from a central marketplace where buyers and sellers or their representatives congregate。The exercise (or strike) prices bracket the stock price. While exercise prices generally are set at fivepoint intervals, larger intervals sometimes are set for stocks selling above $100, and intervals of $ may be used for stocks selling at low prices. If the stock price moves outside the range of exercise prices of the existing set of options, new options with appropriate exercise prices may be offered. Therefore, at any time, both inthemoney and outofthemoney options will be listed, as in this example.a.The Options Clearing CorporationThe Options Clearing Corporation (OCC), the clearinghouse for options trading, is jointly owned by the exchanges on which stock options are traded. Buyers and sellers of options who agree on a price will strike a deal. At this point, the OCC steps in. The OCC places itself between the two traders, being the effective buyer of the option from the writer and the effective writer of the option to the buyer. All individuals, therefore, deal only with the OCC, which effectively guarantees contract performance.s 100 stock group. The weights are proportional to the market value of outstanding equity for each stock. The Dow Jones Industrial Index, by contrast, is a pric