Posted on 15 August 2009
Tags: Asset-or-nothing call, Asset-or-nothing put, Binary Options, Black-Scholes model, Black-Scholes Valuation of Binary Options, Cash-or-nothing call, Cash-or-nothing put, digital call, foreign currency, foreign exchange, foreign exchange market, foreign interest rate, forex, Forex trading, FX market, Risk-Free Interest Rate, Skew, skew slope, stock price, vanilla European call, vanilla options, Vega of the vanilla call
In the Black-Scholes model, we can find the price of the option by the formulas below. In these, stock price is denoted by S, strike price is denoted by K, time to maturity is denoted by T , dividend rate is denoted by q, risk-free interest rate is denoted by r and volatility is denoted by σ . the cumulative distribution function of the normal distribution is denoted by Φ,
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and,
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Cash-or-nothing call
If the spot is above the strike at maturity then this pays out one unit of cash. Now its value is given by,
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Cash-or-nothing put
If the spot is below the strike at maturity then this pays out one unit of cash. Now its value is given by,
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Asset-or-nothing call
If the spot is above the strike at maturity then this pays out one unit of asset. Now its value is given by,
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Posted on 13 August 2009
Tags: Black-Scholes evaluation model, call warrants, Components of Market Value of Warrant, currency trading, dividends, exercise price, Factors Affecting Time Value, foreign exchange market, forex, Forex Market, FX market, in the money, interest rates, Intrinsic value, Market Value of Warrant, out of the money, Pricing of Warrants, put warrants, stock price, Strike price, time decay, time to expiry, Time value, underlying instrument, volatility, warrant, warrant prices, warrant's exercise price, warrant's time value
There are various methods (models) of evaluation that are available in order to value warrants theoretically, in these models the Black-Scholes evaluation model is also included. However, it is important for the investors to have some understanding about the various influences on warrant prices.
Components of Market Value of Warrant
We can divide the market value of a warrant into two components:
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Intrinsic value
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Time value
Intrinsic Value
Intrinsic value is simply the difference between the exercise (strike) price and the underlying stock price. Warrants are also known as in-the-money or out-of-the-money, but that depends on where the current asset price is in relation to the warrant’s exercise price.
Thus, for example, for call warrants, the warrant has no intrinsic value (only time value – to be explained shortly), if the stock price is below the strike price. The warrant has intrinsic value and is said to be in-the-money if the stock price is above the strike.
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Posted on 13 August 2009
Tags: bear contracts, bond, broker, callable bull, company’s ticker symbol, Deutsche Börse, dividends, financial markets, holder, Hong Kong Stock Exchange, Introduction to Warrant, liquidity, listed exchange, lower interest rates, potential buyers, Secondary Market, security, stock, stock of the company, stock price, warrant, warrant transactions, warrant's price
In finance, warrant is a name given to a security that entitles the holder to buy stock of the company that issued it at a specified price, usually this price is higher than the stock price at time of issue.
Frequently Warrants are attached as a sweetener to bonds or preferred stock, by which the issuer is allowed to pay lower interest rates or dividends. Also in order to enhance the yield of the bond they can be used, and they make bonds more attractive to potential buyers. Moreover warrants can also be used in private equity deals. Frequently, these warrants are detachable, and they can be sold independently of the bond or stock.
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Posted on 11 August 2009
Tags: additional tax code requirements, dividend yield, employee compensation, Employee Stock Options, Employee Stock Options In USA, fair market value, financial economic theory volatility, financial statements, foreign exchange markets, Forex trading, FX market, IASB, Incentive stock options, income statement, interest rate, IRS, ISOs, Non-qualified stock options, NQSOs, NSOs, of employee stock options in the USA, over-reporting of income, overstate income, SEC, Stock Market Downturn, stock price, stocks, tax treatment of US Stock option, Taxation of Employee Stock Options in the USA, Types of Employee Stock Options, USA, USA GAAP, valuation model
In this article I will discuss the USA GAAP, Types of Employee Stock Options and Taxation of employee stock options in the USA.
USA GAAP
According to US generally accepted accounting principles that took effect before June 2005, stock options that are granted to employees did not need to be recognized as an expense on the income statement when granted, although in the notes the cost was disclosed to the financial statements. By this a potentially large form of employee compensation is allowed to not show up as an expense in the current year, and therefore, currently it overstate income. It has been asserted by many assert that over-reporting of income by such methods as this by American corporations had been one of the factors that contributed in the Stock Market Downturn of 2002.
In the US, employee stock options have to be expensed under US GAAP. Each company must initiate expensing stock options from the first reporting period of a fiscal year that began after June 15, 2005. As for most companies the fiscal years are the calendars, for most companies by this it means beginning with the first quarter of 2006.
As a result of this, companies by which the expensing options have not been voluntarily started will only see an income statement effect in fiscal year 2006. After the effective date, companies will be allowed, but they are not required, to restate prior-period results.
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Posted on 08 August 2009
Tags: at-the-money, call option, commodity, Definition of Strike Price, exercise price, fixed price, forex, Forex Market, Forex trading, FX market, IBM, in the money, market price, Mathematical Formula, monetary value, Moneyness, moneyness of options, out of the money, spot price, stock price, Strike price, underlying security
In options, a key variable in a derivatives contract between two parties is known as the strike price, or exercise price. Where the delivery of the underlying instrument is required by the contract, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.
Definition of Strike Price
The strike price is the fixed price at which the owner of an option is able to purchase the underlying security or commodity, in the case of a call, or sell, it in the case of a put. When the option is exercised it is that price at which the stock will be bought or sold.
Usually the strike price is referred to as the exercise price.
For instance, an IBM May 50 Call has a strike/exercise price of $50 a share. When the option is exercised 100 shares of IBM stock for $50 a share will be bought (Call option) by the owner of the option.
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