- CFA Exams
- Forums
- General Forum
- Topic: Overwhelmed by Options! Help/Advise?

Author | Topic: Overwhelmed by Options! Help/Advise? |
---|---|

williamtopguy@2014-05-11 16:43:34 |
Hello everyone, I'm completely overwhelmed by the options section for level 1! I'm using the CFA books and am having a hard time understanding the various intricacies of options (i'm fine with futures and forwards). With regards to options, I understand the basic format of puts and calls and how one makes money off going long/short each one.. but am struggling with completely understanding the nuts and bolts of the section.. for example i'm struggling with: 1. the maximum and minimum values of European options and American options 2. how the max and min Values for options are different for the max/min Bounds for options 3. put-call parity basically.. considering options are a small part of level 1, I don't feel like spending an inordinate amount of time studying for this section. Can anyone share how in-depth we need to know this section? For example, are we required to memorize the formulas for constructing synthetic options? Thanks so much for your help! |

chiawen@2014-06-02 03:53:23 |
hi there, 2. there is not so much a difference... the boundaries are just a more strict refinement of the min/max values... in fact, if you compare those you will notice that the boundaries give a more strict minimum lower value for the option instead of just saying they must be >=0. 1. if you have problems deriving the results, dont worry, you're just expected to know the boundaries. although in my opinion, being able to derive results gives a more intuitive understanding.. i don't want to rewrite the passage from my AN study notes, but the general idea is as follows: (for minimum Euro-call value) that they create a portfolio out of stock, call option, and cash, which at maturity will always have a positive or zero value (depending on what the spot price is), thus it MUST have a positve value today (>=0). then they just re-arrange the terms, i.e. solve for the call value. the american call must be worth at least as much, because it gives more flexibility! i.e. C>=c note that for a non-dividend paying stock, early exercise is not favourable.. (for minimum euro-put value) same logic as with call. construction of a portfolio that yields +/0 payoff at maturity... this must be >=0. re-arrange.. for the american put however, early exercise might be favourable, thus in this case the lower value is different for the amercian option. 3. PCP the logic is, that the a fiduciary call and a protective put at maturity will always have the same payoff, thus the two strategies must have an equal value. fiduciary call (FC)= zero-bond (face=X) long + call long (strike=X) protective put (PP) = stock long + put long (strike=X) let's say S(T)>X (call has value, put doesn't) FC=X+(S(T)-X)=S(T) PP=S(T)+0=S(T) alternatively, let's say S(T) PP=S(T)+(X-S(T))=X => FC=PP in present value terms: PV(X)+c(0)=S(0)+p(0) et voilą, here goes the PCP.. with synthetic options, do you mean building the tracking portfolio (a portfolio that has equal payoffs than the option; usually we need this for calculating arbitrage profits)? then yes, you are expected to know that... but good news, just re-arrange the PCP. cheers |