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Financial Options and Applications in Corporate Finance

Define each of the following terms: a. Option; call option; put option; b. Exercise value; strike price; c. Black-Scholes option pricing model

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a. Option - Options are extremely versatile securities that represent a contract which is sold by one party to another party offering the buyer the right, but not the obligation, to buy or sell a security or other financial asset at a previously agreed upon price during a specific period of time or on a specific date (exercise date). Options are used by traders to speculate, which can be very risky, while hedgers use options to decrease the risk of holding an asset.

Call option - These types of options give the owner the right to purchase 100 shares of a stock or an index at the strike price by the exercise date. Call options have the following four characteristics; 1) there is an underlying stock or index, 2) there is an expiration date of the option, 3) there is a strike price of the option and 4) the option is the right ...

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The financial options and applications in corporate finances are discussed.