© 2009 mcgraw-hill ryerson limited 14- 1 chapter 14 options options on common stocks options on...

© 2009 McGraw-Hill Ryerson © 2009 McGraw-Hill Ryerson LimitedLimited

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Chapter 14Chapter 14

OptionsOptions•Options on common stocksOptions on common stocks•Why optionsWhy options•Option “Moneyness”Option “Moneyness”•Option payoffs and profitsOption payoffs and profits•Option strategiesOption strategies•Option prices, intrinsic values and Option prices, intrinsic values and

arbitragearbitrage•Employee stock options Employee stock options •Put-call parityPut-call parity•Stock index optionsStock index options•Foreign currency optionsForeign currency options•WarrantsWarrants•The Canadian Derivatives Clearing The Canadian Derivatives Clearing

Corporation Corporation


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Stock OptionsStock Options

In this chapter, we will discuss general In this chapter, we will discuss general features of options, but will focus on options features of options, but will focus on options on individual common stocks. on individual common stocks.

We will see the tremendous flexibility that We will see the tremendous flexibility that options offer investors in designing investment options offer investors in designing investment strategies.strategies.


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Option BasicsOption Basics A stock option is a A stock option is a derivative securityderivative security,, because because

the value of the option is “derived” from the the value of the option is “derived” from the value of the underlying common stock.value of the underlying common stock.

There are two basic option types. There are two basic option types. Call options are options to are options to buy the underlying asset. the underlying asset. Put options are options to are options to sell an underlying asset. an underlying asset.

Listed Option contracts are standardized to Listed Option contracts are standardized to facilitate trading and price reporting.facilitate trading and price reporting. Listed stock options give the option holder the right Listed stock options give the option holder the right

to buy or sell 100 shares of stock.to buy or sell 100 shares of stock.


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Option BasicsOption Basics Option contracts are legal agreements between two parties—Option contracts are legal agreements between two parties—

the buyer of the option, and the seller of the option.the buyer of the option, and the seller of the option. The minimum terms stipulated by stock option contracts are:The minimum terms stipulated by stock option contracts are:

The identity of the underlying stock.The identity of the underlying stock. The strike price, or exercise price.The strike price, or exercise price. The option contract size.The option contract size. The option expiration date, or option maturity.The option expiration date, or option maturity. The option exercise style (The option exercise style (AmericanAmerican or or EuropeanEuropean).). The delivery, or settlement, procedure.The delivery, or settlement, procedure.

Stock options trade at organized options exchanges, such as Stock options trade at organized options exchanges, such as the CBOE, as well as over-the-counter (OTC) options the CBOE, as well as over-the-counter (OTC) options markets.markets.


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Option Price QuotesOption Price Quotes A list of available option contracts and their prices for a A list of available option contracts and their prices for a

particular security is known as an particular security is known as an option chainoption chain.. Option chains are available online through many sources, Option chains are available online through many sources,

including the Montreal exchange (including the Montreal exchange (http://www.m-x.ca), CBOE ), CBOE ((http://quote.cboe.com) and Yahoo! ) and Yahoo! (http://finance.yahoo.com).(http://finance.yahoo.com).

Stock option ticker symbols include:Stock option ticker symbols include: Letters to identify the underlying stock.Letters to identify the underlying stock. A Letter to identify the expiration month as well as whether the option A Letter to identify the expiration month as well as whether the option

is a call or a put. is a call or a put. A Letter to identify the strike price (a bit more complicated—see A Letter to identify the strike price (a bit more complicated—see

Yahoo or Stock-Trak for tables to explain this letter.)Yahoo or Stock-Trak for tables to explain this letter.)

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Listed Option Quotes on the WebListed Option Quotes on the Web


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Why Options?Why Options? A basic question asked by investors is: “Why A basic question asked by investors is: “Why

buy stock options instead of shares in the buy stock options instead of shares in the underlying stock?”underlying stock?”

To answer this question, we compare the To answer this question, we compare the possible outcomes from these two investment possible outcomes from these two investment strategies:strategies: Buy the underlying stockBuy the underlying stock Buy options on the underlying stockBuy options on the underlying stock


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Buying the Stock versus Buying a Call OptionBuying the Stock versus Buying a Call Option

IBM is selling for $90 per share and call IBM is selling for $90 per share and call options with a strike price of $90 are $5 per options with a strike price of $90 are $5 per share.share.

Investment for 100 shares:Investment for 100 shares: IBM Shares: $9,000IBM Shares: $9,000 One listed call option contract: ($500)One listed call option contract: ($500)

Suppose further that the option expires in three Suppose further that the option expires in three months.Finally, let’s say that in three months, months.Finally, let’s say that in three months, the price of IBM shares will either be: $100, the price of IBM shares will either be: $100, $90, or $80.$90, or $80.

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Buying the Underlying Stock versus Buying the Underlying Stock versus Buying a Call OptionBuying a Call Option

Let’s calculate the dollar and percentage return given Let’s calculate the dollar and percentage return given each of the prices for IBM stock:each of the prices for IBM stock:

Buy 100 IBM Shares Buy 100 IBM Shares ($9000 Investment):($9000 Investment):

Buy One Call Option Buy One Call Option ($500 Investment):($500 Investment):

Dollar Dollar Profit:Profit:

Percentage Percentage Return:Return:

Dollar Dollar Profit:Profit:

Percentage Percentage Return:Return:

Case I: $100Case I: $100 $1,000$1,000 11.11%11.11% $500$500 100%100%

Case II: $90Case II: $90 $0$0 0%0% -$500-$500 -100%-100%

Case III: $80Case III: $80 -$1,000-$1,000 -11.11%-11.11% -$500-$500 -100%-100%


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Why Options? ConclusionWhy Options? Conclusion

Whether one strategy is preferred over another is a matter for Whether one strategy is preferred over another is a matter for each individual investor to decide.each individual investor to decide. That is, in some instances investing in the underlying stock will be That is, in some instances investing in the underlying stock will be

better. In other instances, investing in the option will be better.better. In other instances, investing in the option will be better. Each investor must weight the risk and return trade-off offered by the Each investor must weight the risk and return trade-off offered by the

strategies.strategies. It is important to see that call options offer an alternative It is important to see that call options offer an alternative

means of formulating investment strategies.means of formulating investment strategies. For 100 shares, the For 100 shares, the dollardollar gain and loss potential with call options is gain and loss potential with call options is

lower.lower. The positive and negative The positive and negative percentage return percentage return with call options is with call options is

higherhigher..


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Option “Moneyness”Option “Moneyness” ““In-the-money” option: An option that would yield a positive In-the-money” option: An option that would yield a positive

payoff if exercised payoff if exercised ““Out-of-the-money” option: An option that would NOT yield Out-of-the-money” option: An option that would NOT yield

a positive payoff if exerciseda positive payoff if exercised Use the relationship between S (the stock price) and K (the Use the relationship between S (the stock price) and K (the

strike price):strike price):

Note for a given strike price, only the call or the put can be “in-the-Note for a given strike price, only the call or the put can be “in-the-money.”money.”

In-the-In-the-MoneyMoney

Out-of-the-Out-of-the-MoneyMoney

Call OptionCall Option S > KS > K S S ≤ K≤ K

Put OptionPut Option S < KS < K S S ≥ K≥ K

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Option WritingOption Writing The act of selling an option is referred to as The act of selling an option is referred to as option writingoption writing. .

The seller of an option contract is called The seller of an option contract is called thethe writerwriter. . The WriterThe Writer of a call option contract of a call option contract is obligated is obligated to sell the to sell the

underlying asset to the call option holder.underlying asset to the call option holder. The call option The call option holderholder hashas thethe rightright to exercise the call option to exercise the call option

(i.e., buy the underlying asset at the strike price).(i.e., buy the underlying asset at the strike price). The Writer The Writer of a put option contract of a put option contract is obligated is obligated to buy the to buy the

underlying asset from the put option holder.underlying asset from the put option holder. The put option The put option holder hasholder has thethe right right to exerciseto exercise the put option the put option

(i.e., sell the underlying asset at the strike price).(i.e., sell the underlying asset at the strike price). Because option writing Because option writing obligatesobligates the option writer, the the option writer, the

writer receives the price of the option today from the buyer.writer receives the price of the option today from the buyer.


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Option ExerciseOption ExerciseOption holders have the Option holders have the right to exerciseright to exercise their option. their option.

If this right is only available at the option expiration date, If this right is only available at the option expiration date, the option is said to have the option is said to have European-styleEuropean-style exercise.exercise.

If this right is available at any time up to and including the If this right is available at any time up to and including the option expiration date, the option is said to have option expiration date, the option is said to have American-StyleAmerican-Style exercise.exercise.

Exercise style is not linked to where the option trades. Exercise style is not linked to where the option trades. European-styleEuropean-style and and American-StyleAmerican-Style options trade in options trade in the U.S., as well as on other option exchanges the U.S., as well as on other option exchanges throughout the world.throughout the world.

Very Important: Option holders also have the Very Important: Option holders also have the right to sellright to sell their option at any time. That is, they do not have to exercise their option at any time. That is, they do not have to exercise the option if they no longer want it.the option if they no longer want it.


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Option Payoffs versus Option ProfitsOption Payoffs versus Option Profits

It is useful to think about option investment strategies in It is useful to think about option investment strategies in terms of their initial cash flows and terminal cash flows.terms of their initial cash flows and terminal cash flows. The initial cash flow of an option is the price of the option The initial cash flow of an option is the price of the option

which is often called the option premium.which is often called the option premium. The terminal cash flow of an option is the value of an option at The terminal cash flow of an option is the value of an option at

expiration. (The terminal cash flow can be realized by the expiration. (The terminal cash flow can be realized by the option holder by exercising the option.)option holder by exercising the option.)

The terminal cash flow is often called the option payoff.The terminal cash flow is often called the option payoff. Option Profits are calculated by subtracting the initial Option Profits are calculated by subtracting the initial

cash flow (option premium) from the terminal cash flow cash flow (option premium) from the terminal cash flow (option payoff).(option payoff).


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Call Option PayoffsCall Option Payoffs


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Put Option PayoffsPut Option Payoffs


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Call Option ProfitsCall Option Profits


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Put Option ProfitsPut Option Profits


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Option StrategiesOption Strategies Protective put - Strategy of buying a put option on a - Strategy of buying a put option on a

stock already owned. This protects against a decline in stock already owned. This protects against a decline in value (i.e., it is "insurance")value (i.e., it is "insurance")

Covered call - Strategy of selling a call option on stock - Strategy of selling a call option on stock already owned. This exchanges “upside” potential for already owned. This exchanges “upside” potential for current income.current income.

Straddle - Buying or selling a call and a put with the - Buying or selling a call and a put with the samesame exercise price. Buying is a exercise price. Buying is a longlong straddle; selling is straddle; selling is a a shortshort straddle. straddle.

There are many option trading strategies available to option There are many option trading strategies available to option traders. For ideas on option trading strategies, see:traders. For ideas on option trading strategies, see: www.commodityworld.comwww.commodityworld.com www.writecall.comwww.writecall.com


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ArbitrageArbitrage ArbitrageArbitrage::

No possibility of a lossNo possibility of a loss A potential for a gainA potential for a gain No cash outlayNo cash outlay

In finance, arbitrage is not allowed to persist.In finance, arbitrage is not allowed to persist. ““Absence of Arbitrage” = “No Free Lunch” Absence of Arbitrage” = “No Free Lunch” The “Absence of Arbitrage” rule is often used in finance to The “Absence of Arbitrage” rule is often used in finance to

figure out prices of derivative securities.figure out prices of derivative securities. Think about what would happen if arbitrage were Think about what would happen if arbitrage were

allowed to persist. (Easy money for everybody)allowed to persist. (Easy money for everybody)


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The Upper Bound for a Call Option PriceThe Upper Bound for a Call Option Price

Call option price must be less than the stock price. Otherwise, Otherwise, arbitragearbitrage will be possible. will be possible.

Suppose you see a call option selling for $65, and the Suppose you see a call option selling for $65, and the underlying stock is selling for $60.underlying stock is selling for $60. The arbitrage: The arbitrage: sellsell the call, and the call, and buybuy the stock. the stock.

Worst case? The option is exercised and you pocket $5.Worst case? The option is exercised and you pocket $5. Best case? The stock sells for less than $65 at option expiration, Best case? The stock sells for less than $65 at option expiration,

and you keep all of the $65. and you keep all of the $65.

There was zero cash outlay today, there was no possibility There was zero cash outlay today, there was no possibility of loss, and there was a potential for gain.of loss, and there was a potential for gain.


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The Upper Bound for a Put Option PriceThe Upper Bound for a Put Option Price

Put option price must be less than the strike price.Put option price must be less than the strike price. Otherwise, Otherwise, arbitragearbitrage will be possible. will be possible.

Suppose there is a put option with a strike price of $50 and this Suppose there is a put option with a strike price of $50 and this put is selling for $60. The put is selling for $60. The ArbitrageArbitrage: : SellSell the put, and the put, and investinvest the the $60 in the bank. (Note you have zero cash outlay).$60 in the bank. (Note you have zero cash outlay).

Worse case? Stock price goes to zero.Worse case? Stock price goes to zero. You must pay $50 for the stock (because you were the put writer). But, you You must pay $50 for the stock (because you were the put writer). But, you

have $60 from the sale of the put (plus interest).have $60 from the sale of the put (plus interest).

Best case? Stock price is at least $50 at expiration.Best case? Stock price is at least $50 at expiration. The put expires with zero value (and you are off the hook).The put expires with zero value (and you are off the hook). You keep the entire $60, plus interest.You keep the entire $60, plus interest.


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The Lower Bound on Option PricesThe Lower Bound on Option Prices Option prices must be at least zero. Option prices must be at least zero.

By definition, an option can simply be discarded.By definition, an option can simply be discarded. To derive a meaningful lower bound, we need To derive a meaningful lower bound, we need

to introduce a new term: to introduce a new term: intrinsic valueintrinsic value..

The The intrinsic valueintrinsic value of an option is the payoff of an option is the payoff that an option holder receives if the underlying that an option holder receives if the underlying stock price does not change from its current stock price does not change from its current value.value.


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Option Intrinsic ValuesOption Intrinsic Values That is, if S is the current stock price, and K is That is, if S is the current stock price, and K is

the strike price of the option:the strike price of the option:

Call option intrinsic value = max [0, Call option intrinsic value = max [0, SS –– KK ]]

In words: The call option intrinsic value is the In words: The call option intrinsic value is the maximum maximum of zeroof zero or or the stock price minus the strike the stock price minus the strike price.price.

Put option intrinsic value = max [0, Put option intrinsic value = max [0, KK –– SS ]]

In words: The put option intrinsic value is the In words: The put option intrinsic value is the maximummaximum of zero of zero or or the strike price minus the stock the strike price minus the stock price.price.


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Option “Moneyness”Option “Moneyness” “In the Money” options have a options have a positivepositive intrinsic value. intrinsic value.

For calls, the strike price is For calls, the strike price is lessless than the stock price. than the stock price. For puts, the strike price is For puts, the strike price is greatergreater than the stock price. than the stock price.

“Out of the Money” options have a options have a zerozero intrinsic value. intrinsic value. For calls, the strike price is For calls, the strike price is greatergreater than the stock price. than the stock price. For puts, the strike price is For puts, the strike price is lessless than the stock price. than the stock price.

“At the Money” options is a term used for options when options is a term used for options when the stock price and the strike price are about the same.the stock price and the strike price are about the same.


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Intrinsic Values and Arbitrage, CallsIntrinsic Values and Arbitrage, Calls Call options with American-style exercise Call options with American-style exercise

must sell for at least their intrinsic value. must sell for at least their intrinsic value. (Otherwise, there is (Otherwise, there is arbitrage))

Suppose: S = $60; C = $5; K = $50. Suppose: S = $60; C = $5; K = $50. Instant Arbitrage. How?Instant Arbitrage. How?

Buy the call for $5.Buy the call for $5. Immediately exercise the call, and buy the stock Immediately exercise the call, and buy the stock

for $50.In the next instant, sell the stock at the for $50.In the next instant, sell the stock at the market price of $60.market price of $60.

You made a profit with zero cash outlay.You made a profit with zero cash outlay.


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Intrinsic Values and Arbitrage, PutsIntrinsic Values and Arbitrage, Puts Put options with American-style exercise must sell Put options with American-style exercise must sell

for at least their intrinsic value. (Otherwise, there is for at least their intrinsic value. (Otherwise, there is arbitrage))

Suppose: S = $40; P = $5; K = $50. Suppose: S = $40; P = $5; K = $50. Instant Arbitrage. How?Instant Arbitrage. How?

BuyBuy the put for $5. the put for $5. Buy Buy the stock for $40.the stock for $40. Immediately Immediately exerciseexercise the put, and sell the stock for $50 the put, and sell the stock for $50

You made a profit with zero cash outlay.You made a profit with zero cash outlay.


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Back to Lower Bounds for Option PricesBack to Lower Bounds for Option Prices Option prices cannot be less than the option Option prices cannot be less than the option

intrinsic value.intrinsic value. Otherwise, arbitrage will be possible.Otherwise, arbitrage will be possible. Note that immediate exercise was needed. Note that immediate exercise was needed. Therefore, options needed to have American-style Therefore, options needed to have American-style

exercise.exercise. Using equations: If S is the current stock price, Using equations: If S is the current stock price,

and K is the strike price:and K is the strike price:Call option price Call option price max [0, max [0, SS –– KK ]]

Put option price Put option price max [0, max [0, KK –– SS ]]


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Employee Stock Options, ESOsEmployee Stock Options, ESOs

Essentially, an employee stock option is a Essentially, an employee stock option is a call option that a firm that a firm gives to employees.to employees. These call options allow the employees to buy These call options allow the employees to buy

shares of stock in the company.shares of stock in the company. Giving stock options to employees is a widespread Giving stock options to employees is a widespread

practice.practice. Because you might soon be an ESO holder, an Because you might soon be an ESO holder, an

understanding of ESOs is important.understanding of ESOs is important.

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Features of ESOsFeatures of ESOs ESOs have features that ordinary call options do not. ESOs have features that ordinary call options do not.

Details vary by firm, but:Details vary by firm, but: The life of the ESO is generally 10 years.The life of the ESO is generally 10 years. ESOs cannot be sold.ESOs cannot be sold. ESOs have a “vesting” period of about 3 years.ESOs have a “vesting” period of about 3 years.

Employees cannot exercise their ESOs until they have Employees cannot exercise their ESOs until they have worked for the company for this vesting period.worked for the company for this vesting period.

If an employee leaves the company before the ESOs are If an employee leaves the company before the ESOs are “vested," the employees lose the ESOs. “vested," the employees lose the ESOs.

If an employee stays for the vesting period, the ESOs can If an employee stays for the vesting period, the ESOs can be exercised any time over the remaining life of the ESO.be exercised any time over the remaining life of the ESO.


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Why are ESOs Granted?Why are ESOs Granted?

Owners of a corporation (i.e., the stockholders) have a Owners of a corporation (i.e., the stockholders) have a basic problem. basic problem. How do they get their employees to make decisions that help the stock price increase?

ESOs are a powerful motivator, because payoffs to ESOs are a powerful motivator, because payoffs to options can be large.High stock prices: ESO holders options can be large.High stock prices: ESO holders gain and shareholders gain.gain and shareholders gain.

ESOs have no upfront costs to the company.ESOs have no upfront costs to the company. ESOs can be viewed as a substitute for ordinary ESOs can be viewed as a substitute for ordinary

wages. Therefore, ESOs are helpful in recruiting wages. Therefore, ESOs are helpful in recruiting employees. employees.


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ESO RepricingESO Repricing

ESOs are generally issued exactly “at the money.”ESOs are generally issued exactly “at the money.” Intrinsic value is zero.Intrinsic value is zero. There is no value from immediate exercise.But, the ESO is still There is no value from immediate exercise.But, the ESO is still

valuable.valuable. If the stock price falls after the ESO is granted, the ESO If the stock price falls after the ESO is granted, the ESO

is said to be “underwater.”is said to be “underwater.” Occasionally, companies will lower the strike prices of Occasionally, companies will lower the strike prices of

ESOs that are “underwater.”ESOs that are “underwater.” This practice is called “restriking” or “repricing.” This practice This practice is called “restriking” or “repricing.” This practice

is controversial.is controversial.


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ESO Repricing ControversyESO Repricing Controversy Once an ESO is “underwater,” it loses its ability to Once an ESO is “underwater,” it loses its ability to

motivate employees.motivate employees. Employees realize that there is only a small chance for Employees realize that there is only a small chance for

a payoff from their ESOs. Employees may leave for a payoff from their ESOs. Employees may leave for other companies where they get “fresh” options.other companies where they get “fresh” options.

Lowering a strike price is a reward for failing.Lowering a strike price is a reward for failing. After all, decisions by employees made the stock price After all, decisions by employees made the stock price

fall.fall. If employees know that ESOs will be repriced, the If employees know that ESOs will be repriced, the

ESOs loose their ability to motivate employees.ESOs loose their ability to motivate employees.


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ESOs TodayESOs Today Most companies award ESO on a regular basis.Most companies award ESO on a regular basis.

QuarterlyQuarterly AnnuallyAnnually

Therefore, employees will always have some “at Therefore, employees will always have some “at the money” options.the money” options.

Regular grants of ESOs means that employees Regular grants of ESOs means that employees always have some “unvested” ESOs—giving always have some “unvested” ESOs—giving them the added incentive to remain with the them the added incentive to remain with the company.company.


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Put-Call ParityPut-Call Parity Put-Call Parity is perhaps the most Put-Call Parity is perhaps the most

fundamental relationship in option pricing.fundamental relationship in option pricing.

Put-Call Parity is generally used for options Put-Call Parity is generally used for options with European-style exercise.with European-style exercise.

Put-Call Parity states: the difference between Put-Call Parity states: the difference between the call price and the put price equals the the call price and the put price equals the difference between the stock price and the difference between the stock price and the discounted strike price.discounted strike price.


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The Put-Call Parity FormulaThe Put-Call Parity Formula

In the formula:In the formula: C is the call option price todayC is the call option price today S is the stock price todayS is the stock price today r is the risk-free interest rater is the risk-free interest rate P is the put option price todayP is the put option price today K is the strike price of the put and the callK is the strike price of the put and the call T is the time remaining until option expirationT is the time remaining until option expiration

Note: this formula can be rearranged: Note: this formula can be rearranged:

rTKeSPC

CPSKe rT

e-rT is a discount factor, so Ke-rT is simply the discounted strike price.


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Why Put-Call Parity WorksWhy Put-Call Parity Works

If two securities have the same risk-less pay-If two securities have the same risk-less pay-off in the future, they must sell for the same off in the future, they must sell for the same price today.price today.

Today, suppose an investor forms the Today, suppose an investor forms the following portfolio:following portfolio: Buys 100 shares of Microsoft stockBuys 100 shares of Microsoft stock Writes one Microsoft call option contractWrites one Microsoft call option contract Buys one Microsoft put option contract.Buys one Microsoft put option contract.


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Why Put-Call Parity WorksWhy Put-Call Parity Works

At option expiration, this portfolio will be worth:


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Put-Call Parity NotesPut-Call Parity Notes

Notice that the portfolio is Notice that the portfolio is alwaysalways worth $K at worth $K at expiration. That is, it is riskless.expiration. That is, it is riskless.

Therefore, the value of this portfolio today is $KeTherefore, the value of this portfolio today is $Ke -rT-rT.. That is, to prevent arbitrage: today’s cost of buying 100 That is, to prevent arbitrage: today’s cost of buying 100

shares and buying one put (net of the proceeds of shares and buying one put (net of the proceeds of writing one call), should equal the price of a risk-less writing one call), should equal the price of a risk-less security with a face value of $K, and a maturity of T. security with a face value of $K, and a maturity of T.

Fun fact: If S = K (and if rT > 0), then C > P.Fun fact: If S = K (and if rT > 0), then C > P.


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Stock Index OptionsStock Index Options

A stock index option is an option on a stock A stock index option is an option on a stock market index.market index.

Because the actual delivery of all stocks Because the actual delivery of all stocks comprising a stock index is impractical, stock comprising a stock index is impractical, stock index options have a index options have a cash settlement procedure. That is, if the option expires in the money, the option That is, if the option expires in the money, the option

writer simply pays the option holder the intrinsic value writer simply pays the option holder the intrinsic value of the option.of the option.

The cash settlement procedure is the same for calls The cash settlement procedure is the same for calls and puts.and puts.


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Index Option TradingIndex Option Trading

Figure 14.6


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Foreign Currency OptionsForeign Currency Options Foreign currency option contracts give holders the Foreign currency option contracts give holders the

right to buy (call) or sell certain amount of foreign right to buy (call) or sell certain amount of foreign currency at the strike price until the maturity date. currency at the strike price until the maturity date.

In Canada foreign currency option contracts are not In Canada foreign currency option contracts are not traded.traded.

In USA, Philadelphia Exchange offer six contracts of In USA, Philadelphia Exchange offer six contracts of following currencies against following currencies against

U.S. $ : Australian Dollar, British Pound, Canadian U.S. $ : Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen and Swiss Franc.Dollar, Euro, Japanese Yen and Swiss Franc.


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WarrantsWarrants

Warrants are issued by companies to give the Warrants are issued by companies to give the right of buying the stock of the company at a right of buying the stock of the company at a specified strike price.specified strike price.

Warrants are very similar to call options Warrants are very similar to call options except they are written by the companies. except they are written by the companies.

If a warrant holder decides to exercise the If a warrant holder decides to exercise the right, then the company has to issue new right, then the company has to issue new shares in exchange of strike price. As a result, shares in exchange of strike price. As a result, company gets the cash inflow, but increases company gets the cash inflow, but increases the number of outstanding shares. the number of outstanding shares.


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The Canadian Derivatives Clearing CorporationThe Canadian Derivatives Clearing Corporation

The Canadian Derivatives Clearing Corporation is the The Canadian Derivatives Clearing Corporation is the clearing agency for all derivatives exchanges in clearing agency for all derivatives exchanges in Canada (Montreal and Winnipeg). Canada (Montreal and Winnipeg).

All option contracts traded in Canada are originally All option contracts traded in Canada are originally issued, guaranteed, and cleared by the CDCC. issued, guaranteed, and cleared by the CDCC. Brokerage firms merely act as intermediaries between Brokerage firms merely act as intermediaries between investors and the CDCC.investors and the CDCC.

Visit the CDCC at: Visit the CDCC at: www.cdcc.comwww.cdcc.com..


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Useful WebsitesUseful Websites• For information on options ticker symbols, see:For information on options ticker symbols, see:

www.cboe.comwww.cboe.com www.m-x.cawww.m-x.ca

• To learn more about options, see:To learn more about options, see: www.e-analytics.comwww.e-analytics.com www.tradingmarkets.comwww.tradingmarkets.com www.investorlinks.comwww.investorlinks.com

• Exchanges that trade index options include:Exchanges that trade index options include: www.cboe.comwww.cboe.com www.cbot.comwww.cbot.com www.cme.comwww.cme.com www.m-x.cawww.m-x.ca

© 2009 mcgraw-hill ryerson limited 14- 1 chapter 14 options options on common stocks options on...

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