exercise price

Examples of exercise price in the following topics:

• Stock Warrants

  • A stock warrant entitles the holder to buy the underlying stock of the issuer at a fixed exercise price until the expiration date.
  • A stock warrant is similar to a stock option in that it entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.
  • Premium (the extra amount paid for the shares when exercising the warrant as compared to the market price paid when acquiring the stock through the open market)
  • Restrictions on Exercise (American-style warrants must be exercised before the expiration date and European-style warrants can only be exercised on the expiration date.
  • They are valued at their exercise price multiplied by the specified number of common shares the warrant provides.

• Overview of Warrants

  • A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.
  • A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.
  • Upon expiration, the warrants are worthless unless the price of the common stock is greater than the exercise price.
  • Intrinsic value: This is simply the difference between the exercise (strike) price and the underlying stock price.
  • Warrants are also referred to as in-the-money or out-of-the-money, depending on where the current asset price is in relation to the warrant's exercise price.

• Employee Stock Compensation

  • Options, as their name implies, do not have to be exercised.
  • The holder of the option should ideally exercise it when the stock's market price rises higher than the option's exercise price.
  • There is no standardized exercise price and it is usually the current price of the company stock at the time of issue.
  • An employee may have stock options that can be exercised at different times of the year and for different exercise prices.
  • Performance or profit goals may need to be met before an employee exercises her options.

• Options Contract

  • All options have an exercise or strike price; the price listed on the option.
  • Investor would more likely exercise the call option to buy at the strike price and sell at the spot price.
  • Investor would not exercise the call option if the strike price exceeds the spot price.
  • On the other hand, an investor would exercise a put option if the strike price exceeds the spot price.
  • Scenario 1: If the spot market price exceeds the $80 strike price, then the company exercises the call options.

• Defining Options and Their Valuation

  • The strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise.
  • The expiration date, which is the last date the option can be exercised.
  • American option – may be exercised on any trading day on or before expiration.
  • Bermudan option – may be exercised only on specified dates on or before expiration.
  • Barrier option – any option with the general characteristic that the underlying security's price must pass a certain level or "barrier" before it can be exercised.

• Chapter Questions

  • A company buys 10 contracts for petroleum that specifies a price of $75 per barrel.
  • Who pays and how much into the margin account if the price of petroleum shoots up to $150 per barrel?
  • You are holding 10 call options for petroleum with a strike price of $75 per barrel.
  • Compute the premium, and whether you will exercise this option if the market price is $50 per barrel?
  • Calculate the farmer's premium, and whether he will exercise this option if the market price of corn equals $6 per bushel?

• Sinking Funds

  • The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
  • The firm has the option to repurchase the bonds at either the market price or the sinking fund price, whichever is lower.
  • The firm can only repurchase a limited fraction of the bond issue at the sinking fund price.
  • However, if the bonds are callable, this comes at a cost to creditors, because the organization has an option on the bonds: The firm will choose to buy back discount bonds (selling below par) at their market price,while exercising its option to buy back premium bonds (selling above par) at par.
  • Therefore, if interest rates fall and bond prices rise, a firm will benefit from the sinking fund provision that enables it to repurchase its bonds at below-market prices.

• Black-Scholes Formula

  • The Black-Scholes formula is a way of pricing a European option.
  • The Black-Scholes formula is a way of pricing a European option (an option that can only be exercised at its expiration date).
  • The Black-Scholes formula explains the relationship between the price of the stock, volatility, the price of the financial derivative (such as an option), and time .
  • reversible, as the model's original output, price, can be used as an input and one of the other variables solved for; the implied volatility calculated in this way is often used to quote option prices
  • The Black-Scholes formula where S is the stock price, C is the price of a European call option, K is the strike price of the option, r is the annualized risk-free interest rate, sigma is the volatility of the stock's returns, and t is time in years (now=0, expiry=T).

• Answers to Chapter 18 Questions

  • Asset's price will fluctuate daily on the spot market.
  • If the difference between the asset price and contract price exceeds a threshold, either the buyer or seller must deposit money with the broker.
  • With the options contract, the holder chooses to exercise it or not.
  • You could exercise the option and pay $75 for petroleum or buy the petroleum from the spot market at $50.
  • Farmer could sell his corn for $6 per bushel on the spot market, or exercise the put option and sell his corn for $5 per bushel.

• Convertible Stock

  • This type of stock has an embedded option that allows it to be converted into a specified number of shares of common stock at a predetermined price; usually at a premium over the stock's market price.
  • The conversion can also be based on the occurrence of certain conditions, such as the stock's market price appreciating to a predetermined level, or the requirement that the conversion take place by a certain date.
  • The conversion is exercised at the security holder's discretion.
  • Preferred stock is reported in the stockholder's equity section as the number of shares outstanding, multiplied by the stock's market price.