Investments, tenth edition

    3.   Options are traded on stocks, stock indexes, foreign currencies, fixed-income securities, and sev-

eral futures contracts.  

    4.   Options can be used either to lever up an investor’s exposure to an asset price or to provide insur-

ance against volatility of asset prices. Popular option strategies include covered calls, protective 

puts, straddles, spreads, and collars.  

    5.   The put-call parity theorem relates the prices of put and call options. If the relationship is vio-

lated, arbitrage opportunities will result. Specifically, the relationship that must be satisfied is   

P

5 C 2 S

0

1 PV(X) 1 PV(dividends)  

     where   X  is the exercise price of both the call and the put options, PV( X ) is the present value of a 

claim to  X  dollars to be paid at the expiration date of the options, and PV(dividends) is the present 

value of dividends to be paid before option expiration.  

    6.   Many commonly traded securities embody option characteristics. Examples of these securities are 

callable bonds, convertible bonds, and warrants. Other arrangements such as collateralized loans 

and limited-liability borrowing can be analyzed as conveying implicit options to one or more parties.  

    7.   Trading in so-called exotic options now takes place in an active over-the-counter market.   

   SUMMARY 

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