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Chapter Twenty Three

Options and Corporate Finance: Basic Concepts

Sixth Edition

23

Prepared by Gady Jacoby University of Manitoba
McGraw-Hill Ryerson
© 2005 McGraw Hill Ryerson Limited

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Chapter Outline
23.1 Options 23.2 Call Options 23.3 Put Options 23.4 Selling Options 23.5 Stock Option Quotations 23.6 Combinations of Options 23.7 Valuing Options 23.8 An Option-Pricing Formula 23.9 Stocks and Bonds as Options 23.10 Capital-Structure Policy and Options 23.11 Mergers and Options 23.12 Investment in Real Projects and Options 23.13 Summary and Conclusions
McGraw-Hill Ryerson
© 2005 McGraw Hill Ryerson Limited

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23.1 Options
Many corporate securities are similar to the stock options that are traded on organized exchanges. Almost every issue of corporate stocks and bonds has option features. In addition, capital structure and capital budgeting decisions can be viewed in terms of options.

McGraw-Hill Ryerson

© 2005 McGraw Hill Ryerson Limited

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23.1 Options Contracts: Preliminaries
An option gives the holder the right, but not the obligation, to buy or sell a given quantity of an asset on (or perhaps before) a given date, at prices agreed upon today. Calls versus Puts Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset at some time in the future, at prices agreed upon today. When exercising a call option, you call in the asset. Put options gives the holder the right, but not the obligation, to sell a given quantity of an asset at some time in the future, at prices agreed upon today. When exercising a put, you put the asset to someone.
McGraw-Hill Ryerson
© 2005 McGraw Hill Ryerson Limited

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23.1 Options Contracts: Preliminaries
Exercising the Option
The act of buying or selling the underlying asset through the option contract.

Strike Price or