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"Financial options are easier to value than the common stocks to which they relate." Discuss - Essay Example
Finance & Accounting
Pages 5 (1255 words)
Financial options are easier to value than the common stocks to which they relate Common Stock Common stocks are shares and securities of a company that resemble ownership in the form of equity of the company. The holders of common stock have the voting rights in electing the Board of Directors and also have controlling power in decision making aspects…
In case of payment of dividends also, the common stocks are allocated dividends only after the preferred stockholders are paid in full. Thus the valuation of common stock is an area of interest for the investors as it gives an idea of the financial health of the company and also a forecast of the future in terms of profit and loss to be incurred by the company. The valuation of common stock is represented in terms of its present value or fair value or intrinsic value (Moyer, Moyer, McGuigan, Rao and Kretlow, p.249). Financial Options Financial options are contracts which give the right to the owner of the Option to buy or sell an underlying stock at certain agreed upon price within a certain period of time. The owner of the financial option is, however, not obligated to buy or sell the underlying stock within the specified time frame. The agreed upon price is called the strike price. When the buyer executes the option of buying the underlying security at the strike price, it is called “call” option. When the buyer executes the option of selling the underlying security at the strike price, it is called “put” option. ...
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