Contingent Risk and Policy Issues

Financial Strategy -- Unit 9

The Open University

Publisher: The Open University, 2000

ISBN: 0-7492-9788-3

Synopsis:

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Table of Contents:

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1. Introduction
• Aims and objectives of the unit
2. Contingent Risk
3. Options
• 3.1 Options — Where Did They Come From?
• 3.2 Options on Shares
4. Analysing Options
• 4.1 Pay-Off Diagrams
• 4.2 Arbitrage and Free Lunches
• American and European options
5. Option Valuation
• 5.1 Valuing Options on Shares
• The Black-Scholes formula
• What are the important variables?
• S – K, the difference between the current price and the exercise price
• σ, the volatility
• t, time to expiry
• r, the risk-free interest rate
• 5.2 Currency Options
• Valuing currency options
• 5.3 Examples and Cases Using Options
• An example of the use of currency options
• Where to use currency options
6. Risk and Policy
• 6.1 Examples of Risk Policy
• Boots
• Blue Circle
• Carlton Communications
• 6.2 Elements of Policy-Setting for Risk Management
• An example; the role of trustees in fund management
• 6.3 Video Case Study and Reading

• Appendix: Proofs of Propositions Concerning Option Valuation
• Proposition 1
• Proof
• Proposition 2
• Proof
• Proposition 3
• Proof
• Proposition 4
• Proof
• Proposition 5