Chapter 16 Option Valuation

These flashcards cover key vocabulary and concepts related to option valuation as discussed in Chapter 16.

Option Valuation

The process of determining the fair value of a financial option.

Intrinsic Value

The value of an option at expiration, calculated as the difference between the underlying asset's price and the option's strike price.

Black-Scholes Model

A mathematical model used to calculate the theoretical price of European options based on several factors like current stock price, strike price, risk-free rate, time to expiration, and volatility.

Put-Call Parity

A principle stating that the price of a call option implies a certain fair price for a put option, based on the prices of the underlying asset.

Delta

A measure of the sensitivity of an option's price to changes in the price of the underlying asset.

Implied Volatility

The market's forecast of a likely movement in the price of an asset, inferred from the price of options.

Employee Stock Option (ESO)

A call option granted to employees that allows them to purchase shares of their company stock at a specified price.

Hedging

The practice of reducing risk in an investment by taking an offsetting position in a related security.

Vesting Period

The time period that an employee must wait before they can exercise their stock options.

Risk-Free Rate

The return on an investment that is considered free of risk, typically associated with government bonds.

Strike Price

The price at which an option can be exercised; the predetermined price for buying or selling the underlying asset.

American Options

Options that can be exercised at any time before expiration.

European Options

Options that can only be exercised at expiration.

Portfolio Beta

A measure of the volatility or systematic risk of a portfolio in comparison to the market as a whole.