Investment Analysis Package Part 1 - Theories

Professor Raad Jassim

Content:
Chapter 2 Margin Requirements

2-10

Chapter 24 Index Calculation

11-13

Chapter 7 Risk & Return / Markowitz

14-21

Chapter 16 Bonds

22-26

Industry Analysis

27-32

Stocks

34-36

Options

37-41

Solutions to selective chapters

46-110

Post-problems solutions

111

Loan Value and Margin Requirements

Canadian securities

Security

Loan Value

Margin Requirement

Option eligible ($5.00+)

70%

30%

Listed ($3.00+)
Listed ($3.00-)

50%
0%

50%
100%

Canadian Dealers Network

0%

100%

Warrants

50%

50%

Loan Value and Margin Requirement

Security

Loan Value

Margin Requirement

Mutual funds ($3.00+)

Mutual funds ($3.00-)

50%
0%

50%
100%

Gov. of Canada bonds

Prov. & Municipal bonds
Corporate bonds

96%
90%
85%

4%
10%
15%

US T-bonds

96%

4%

How does margin work?

How do you calculate the margin requirement on a purchase?
-

# of shares x Price x Margin requirement

Example 1:
-

We are buying 100 TD Waterhouse @ $23.00

100 x $23.00 x 30% = $690.00

This is the margin requirement to buy this stock.

Remember that TD Waterhouse is option eligible and trades above $5.00

Example 2:
-

We want to buy 1000 shares of Cognicase @ $19.00. COG is not option eligible.
1000 x $19.00 x 50% = $9500

This is the margin requirement on this trade. You are borrowing the remaining $9500 from TD
Waterhouse.

Example 3:
-

You want to buy $25,000 face value of a Quebec Provincial Strip bond @ $95
25,000 x $95/100 x 10% = $2375

Again, this amount is your margin requirement. The $21,375 balance is borrowed from TD
Waterhouse.
Dont forget to make sure that the annual yield on the bond youre buying is at least the cost of
borrowing. (7% in this example)

Margin Account Rates

President account:
Canadian debit:

$0 - $99,999
$100,000+

Prime + 0.75% = 7.00%

Prime = 6.25%

Prime + 1.00% = 9.25%

Prime + 0.75% = 9.00%
Prime + 0.50% = 8.75%

US debit:

$0 $24,999
$25,000 $99,999
$100,000+

What if the market goes down?

If the price of the stock you bought on margin drops, its loan value decreases.
This might result in a margin call.
A margin call is an amount of money a client has to come up with in order to keep its
holding.

Short selling margin requirement

Equities
Listed ($3.00+)
Option eligible ($5.00+)
VSE and ASE ($3.00+)
Bonds
Government
Corporate

150%
130%
175%
110%
not allowed

Limit order - Book of specialist

1)
Limit buy
Shares
$
49.75
500
49.50
800
49.25
300
49
200
48.50
600

Limit sell
$
Shares
50.25
100
51.50
100
54.75
300
58.25
100

A) Market buy order for 100 @ what price the fill?

- $50.25
B) Next Market buy-order?
- $51.50
C) As a specialist would you
- Increase

inventory?

2)
Stop-loss of BCE to sell 100 shares @ $55
Current price @ $62
At what price will you sell if price drop to $50?
a. 50

b.55

c. 54.875

d. Cant tell

Below maintenance margin (Mm):

Investor must do something:
1.
2.
3.
4.

Sell some shares or

Send cash
Value of securities no longer support loan
MM determines what investor must do

Above initial margin (Im):

Investor May:
1.
2.
3.
4.

Do nothing
Buy additional shares with no additional cash
Increase loan amount
IM determines what investor may do

Given:
You Short 100 shares @ $50
Dividends of $1/share are paid
You cover position @ $40
Profit = $900

Given:
You short 100 shares @ $50
Dividends of $1/shares are paid
You cover position @ $60
Loss = ($1,100)

No Margin:
Purchase 100 shares @ $50
Sell 100 shares @ $70 in 1 year:
Profit = $2,000
Return = $2,000/$5,000 = 40%

Margin:
Purchase 200 shares @ $50
(Borrow $5000 @ 9%)
Interest = $450
Sell 200 shares @ $70 in 1 year:
Profit = $3,550
Return = $3,550/$5,000 = 71%

No Margin:
Purchase 100 shares @ $50
Sell 100 shares @ $30 in 1 year:
Loss = $2,000
Return = ($2,000)/$5,000 = (40%)

Margin:
Purchase 200 shares @ $50
(Borrow $5000 @ 9%)
Interest = $450
Sell 200 shares @ $30 in 1 year:
Profit = $4,450
Return = ($4,450)/$5,000 = (89%)

10

11

12

13

Measure of Return & Risk

HPR (Holding period return) = Ending value of inv.
Beginning value of inv.
Ex. You commit $200 for one year @ end you get 220
HPR = 220/200 = 1.10
In % term on annual basis
HPY (holding period yield) = HPR - 1
= 1.10 1= 10%
Annual HPR = HPR1/n

(n: no. of years)

Ex. Initial Inv. $250

$350 after 2 years

HPR = 350/250 = 1.4

Annual HPR = 1.4

=1.1832
=1.1832-1 = 18.32%

Computing mean historical returns:

1. AM (arithmetic mean) = HPY/n
2. GM (geometric mean) = [(HPR1)x(HPR2)..(HPRn)] 1/n -1
Ex:
Year
1
2
3

Initial Value
100
115
138

End Value
115
138
110.4

GM = [1.15 x 1.20 x 0.8]1/3 -1 = 3.353%

AM = [0.15 + 0.20 + (-0.20)] = 5%
3

HPR
1.15
1.20
0.80

HPY
0.15
0.20
-0.20

Compare

14

AM biased
Year
1
2

upward ex:
Initial inv.
50
100

End inv.
100
50

HPR
2
0.5

HPY
1
-0.5

AM= [1+ (-0.5)] = 50 = 0.25 = 25%

2
2
1/2
GM= [2 x 0.5] -1 = 11/2 -1 = 0%
If inflation in the market

the portfolio

Calculating expected rates of return:

An investor expects a certain rate of return for his future investment. The historical data is used
as a benchmark for the possibility of future return. A 10% RR expectation could yield a range of
-10%
+25%
The investor assigns probability values to all possible return
E(Ri) expected return = (probability of return)x(possible return)
= P1R1 +P2R2PnRn
Prob./

Ex.1:Singlecondition

1
0.75

E(Ri) =(1)(0.05) = 0.05

0.5
0.25
RR
-0.05

Prob./

0.05

0.10

Ex.2:Multipleconditions

0.8

E(Ri) = (-0.15)(0.2)+(0.15)(-0.2)+(0.7)(0.1)=0.07

0.6

0.4

0.2
RR
-0.2

-0.1

0.1

0.2

15

Measure the risk of expected rates of return

Investors quantify dispersion (instead of graph presentation) using statistical techniques:
Variance & standard deviation to compare risk & return for alternative investments.
Variance

) = (probability) x (possible return expected return)

= (Pi) [Ri- E(Ri)]

Ex1:
Ex2:

=1(0.05-0.05) = 1 x 0 = 0
No variance, no risk
2

= 0.15(0.2-0.07) + 0.15(-0.20-0.07) + 0.7(0.1-0.07) = 0.0141

The greater the dispersion
the greater the risk

Standard deviation (

= 2 or Pi[Ri-E(Ri)]
= 0.11874

Coefficient of variation (CV) = S.D.

E(R)
2
Data misleading
Used in an unadjusted or
Ex:
E(R)

Inv. A
0.07
0.05

Inv. B
0.12
0.07

By observation Inv. B is riskier than Inv. A using CV

CVA = 0.05 = 0.714
0.07
CVB= 0.07 = 0.583
0.12

Inv. B less riskier than Inv. A

16

17

18

19

20

21

Bonds

Fabozzi (Chapter 7 Fabozzi text)

Debt securities (with no embedded options callable, putable, convertible) have the following
fundamental Price/Yield relationship:

Price

Yield

Callable bonds:
1.
2.
3.
4.
5.
6.
7.

Call option gives the holder the right to purchase @ fixed price in future
The right to purchase rests with issuer
Below yield Y: Investors anticipate that firms (issuer) may call bond
Investor receive call price
Bonds market price is bonded by call price
Reinvestment risk : investor will have to invest @ rate. Both coupon & principal
Negative convexity

Price

Option free bond

Negative
Convexity

Yield

22

Putable bonds:
1.
2.
3.
4.

Option gives holder the right to sell bond @ a fixed price in the future
Right to sell rest with investor
Investor has the right to sell bonds @ put strike price
Above Y investor begin to anticipate put bonds back to issuer
Option free bond
Price
Putable bond

Value of put option

Yield

Duration Macaulay:
1st derivative of bonds price function with yield (math)
To find price volatility

find value of duration

1) Duration is a measure of bonds sensitivity to change in yield

i.e. Estimating interest rate risk. [Ave. Mat. Of C.F., math: weighted ave. time
2) Modified duration calculation = Y - Y+
2 V0 (
Ex. 15 yrs (option-free) bond, c=7%, trading @ par
I.R. 50bp, P=95.58 [n=15, put = 7, fv= 100, I/Y = 7.5, CPT PV= 95.586]
I.R 50 bp, P= 104.701
M.D. = 104.7 95.58 =8.845
2(100)(0.005)
3) Estimating price change with M.D : ex 150bp
Estimate = (-1) x D x ( = (-1) 8.845 x (150%) = 13.2675
Actual = [n= 15, pmt = 7, fv = 100, I/Y = 7% - 1.5 %
CPT PV = 115.0561
4) Effective duration calculation (option adjusted): ex. Assume bond callable @102.5
Duration = 102.5 95.856 =6.644vs.8.845
2(100)(0.005)
Pba: price of bond a, Dba: Duration
5) Portfolio duration = Dba Pba + Dbb Pbb
Pbb: price bond b, Dbb: Duration
Pp
Pp
Pp: Price of portfolio
23

Bond Pricing theorems:

(Assume 1 coupon payment/year)
Price

1) If bond price P0 , Yield & the reverse, ex:

Premium

5 yrs bond, P0 = $1000, c = $80

If P0= $1100, Y = 5.76%
If P0= $900, Y = 10.68%

Par
Discount

Time
P5 P4 P3 P2

2) If bond yield does not change over its life, size of premium or discount
par value, as its life gets shorter.
Ex. If P0 = $883.31,

y=9%

P0, a year later = $902.81,

y=9% (coupon 6%)

P1

P0

towards maturity to

3) If yield stable over its life, size of premium & discount will decrease @ an increasing rate,
accelerate towards maturity.
Ex. P5 (issued today) = $883.31
P4
= $902.81
P3
= $924.06

(different from par) = $116.69

= $97.19
= $75.94

19.50%
19.50%

4) If yield , P0 , by an amount > corresponding fall in P0, that occur if there were an equalsized Y.
Ex:

1% yield

P0 $42.12 (increase)

1%

P0 $39.93 (decrease)

yield

5) If coupon rate is high

% change P0 owing to yield change

is smaller.

Ex. Bond D, C = 9%, y=7% : P0 change = 3.889%

Bond C, C = 7%, y=7% : P0 change = 3.993%
Convexity:
1 & 4 theorems

led to bond valuation called convexity

24

How to immunize:
Ex: A portfolio manager is required to have one cash flow of $1,000,000 in 2 years. Bond
available 1 yr & 3 yr
How much should be invested in each issue?
The D of portfolio of bonds = weighted average of D. of individual bonds.
W1 + W3 = 1
(W1 x 1) + (W3 x 2.78) = 2
W1, W3 are proportions of funds to be invested in 1, 3 yrs. bonds
W1 = 0.4382
ie
43.82% of funds
W3 = 0.5618
i.e
56.18%
PV of P1 = $972.73 (c = 7%)
PV of P3 = $950.25 (c = 8%)
PV of 1,000,000 @ 10% Y for Yr 2 = 1,000,000 = 826,446
1.102

Types of passive bond management strategies

1) Net worth immunization: Matching duration of assets, liabilities
Problems: Commercial banks mismatch of maturities short term deposits &bank loans
Bank search strategy may have equal duration different terms
2) Target date immunization: Duration = horizon date
Pension plan to provide firm income for retirement to avoid I.R. change
3) Cash flow matching and dedication:
A. Cash flow matching (single period)
B. Dedication (multi periods)

Manager select 0 and/or coupon bond: where cash flow = obligation

This strategy avoids (-) impacts of I.R. changes as goals are always met.

25

Contingent immunization calculation

Combination active and passive strategy
Min. required return must be immunized, manage the surplus
Given:
$10 million portfolio
2-year horizon date
In 2 years, portfolio value must be at least $11 million (could be 12 million)
Current interest rate = 10%
$11M
= $9.09 M, immunized would give minimum required return
(1.1)
Could actively manage $10M $9.09 M = $0.91M. If lose that entire amount, immunize at that
point.
If you do not lose that amount, you do not immunize & earn more than minimum require return

Price

Portfolio

11
10
09
Trigger point
Immunize

2 yrs

Yield

26

Before starting stock analysis, investor should look

1. Macroeconomic
2. Industry analysis
Top-down analysis
A. Global economy: diversification systematic & unsystematic
Risk: A.1 info on foreign firms
A.2 disclosure
A.3 accounting standards
A.4 political risk
A.5 exchange rate risk
Ex. Emerging market, mutual funds
B. Domestic Micro-economy
1. Gross domestic product (G+S production)
2. Employment: workforce (working and actively searching)
3. Inflation rate, CPI, standard living
4. Interest rates - household, business
5. Budget deficit diff. gov. spending + revenue
6. Sentiment optimism & pessimism of consumer & producer, willingness to produce &
consume
Ex. If nations economy is auto production
For domestic usage & export
If car replacement
longer impact GDP, employment, .
Potential emerging of new industry ex. parts

27

28

Federal Government Policy

1) Fiscal policy
The federal government`s spending and tax actions (demand-side economics)
2) Monetary policy
The manipulation of the money supply (demand-side economics)
A. Open market operations of the FRS (buying/selling US government bonds)
Buying bonds increases the money supply
Selling bonds decreases the money supply
B. Altering the discount rate. Short term rate charges to banks, rate signals expansionary
policy
C. Altering the reserve requirement. Cash of bank deposits with fed
3) Supply side economics
Increase productivity; decease taxes. Investment work

29

Interest rate
1. Supply of funds from savers. Households
2. Demand of funds from businesses to finance: Physical plant, equipment,
inventories.etc.

I.R
Supply households

Gov. action budget deficit

E`
E

Demand corp. firms

Fund

3. Gov. Net. Supply. Demand for funds as modified by actions of fed res bank
Monetary: I.R. & MS
Fiscal: Gov. spending +taxes
Budget deficit: difference between gov. rev. & gov. spending.
Large gov. borrowing force up I.R
Crowd out private borrowing
Private borrowing & inventory chocking off

30

The Business Cycle: is the repetitive cycle of recession & recovery

GDP

2
Recession

Recovery

Time

1. The peak : is the transition from the end of an expansion to the start of a contraction
2. The through: occurs the bottom of a recession as the economy enters a recovery
3. Cyclical industries: are sensitive to state of economy. @through before recovery
attractive investment
Firms: produce consumer durable: automobile
4. Defensive industries: industries produce basic necessities of life, food producers,
pharmaceuticals, public utilities.
In recession they outperform cyclical firms
low betas

The problem is to I.D: peaks & throughs

Economy in actual recession?

5. Growth company : experience above average growth in sales & earning than economy
Y>IRR (cost of capital). Retain large % earning to invest in above average projects.
Identified after results out to the public. Efficient market theory N/A, info net ave.
Undervalued/fairly valued. Search for them before IPO
6. Speculative companies: Assets involve risk
Large chance to lose, small chance to gain
Return: 1) low 2) nonsexist 3) negative
Loto 6/49 better, penny stocks

31

SIC Codes and industry life cycle

A. SIC Codes
15
Building contractors
152
Residential building contractors
1521 Single family residential building contractors
B. Industry life cycle
Sales

Growth

0 Div

Div

Risk
0 Div
Rapid & increasing stable growth
growth

Slowing growth

Minimal or negative
growth

Time

Start-up

New tech
New product
No info (IPO)
Difficult to predict

Consolidation

- Firm leader change

- Stable
- Growing econ.

Maturity

- Market saturate
- Growth < econ.

Relative decline

(-) growth

(Success/fail)

32

C. Sensitivity to the business cycle

1. Sensitivity of sales: is a major determinant, if industry is cyclical or defensive.
If product is a basic necessity of life, low-cost item
relatively unaffected by B.C.
If product is a consumer durable, expensive item
affected by B.C.

2. Operating leverage: Relationship between variable and fixed cost.

-

Firms F.C. are sensitive to B.C. because costs will be incurred regardless of the level of
production & sales
Firms V.C will reduce cost with production

3. Financial leverage: Debt vs. equity financing

Debt payment to bondholders are fixed, must be met regardless of earnings

33

34

The Graham-Rea Model (highest reward-to-risk)

1934 Benjamin Graham book security analysis
Future earning as determinant of stocks value
1974 Benjamin Graham & James Rea repudiated the above principles because of:
Market is efficient (more than previous)
Alternate approach: Certain stocks of certain firms may have inefficiencies to spot
Examine financial statements, compare stock value to AAA bonds
Rewards & risks
yes & no answers
Rewards Q.
1) Is P/E < reciprocal AAA bond yield?
Ex: if y=12%, recip = 1/0.12 = 8.3, 8.3/2=4.16, P/E,4.16
2) Is P/E<40% of its 5 yrs P/E average (P/E current year)
3) Is dividend yield > 2/3 AAA bond yield?
4) IS P0<2/3 book value per share? B.y= tot. Assets = tot. Debt/ out. Shares
5) IS P0<2/3 Net current Asset value/share? Curr. A- total debt/ out. Shares
Risk Q.
6) Is debt/equity>1? Total debt/total equity
7) Is current ratio>2? C.R = Current Assets/Current liabilities
8) Is total debt<2 net current assets?( Current assets= current-total debt)
9) Has E/S growth of last 10 yrs average min 7% per year?
E0 (earnings last year) = E-10(earnings 10 years ago)(1+g)10
E0 = E-10(1+g)10 if yes
10) In #9 more than 8 were less than -5% (steady earning)
Method of selecting stocks (undervalued) to buy
Remove all stock with YES answer to Q.6
Remove stocks that do not provide Yes to Q1, Q3 or Q5
To sell:
If stocks 50% or 2 years passed since purchase
Revisit the questions to eliminate stocks.

35

The quest for value

Bennett Stewart, EVA & MVA
Stern Stewart
Bennett idea with regards to E/share:
- Myth: accounting clever presentation / dressing up!
- Cutting to R&D, avoid acquisition to avoid goodwill & amortization
- Differ expenses that could lead to performance
Market needs earnings? No
Value
EVA: (Economic value added)
Capital budgeting
- Refuse (-) projects & investment companies
- Measure Value & performance
- Improve management skills
- Max return + R&D
- Liquidate unproductive assets & capital: land, rail..
- Retire line of credit
NOPAT (Net operating profit after tax)
EVA (earning = NOPAT cost of capital (WACC)
Capital: equity, debt, all sources of money (credit line)
Cost
Cost is minimum required by shareholders >WACC
Ex. EVA,
EVA = 25Mil 26 Mil = (-1)
Reject-proj.
Ex: Two companies profit 1 million each
A
B
Capital
5 million
10million
Ex: TSE: 145 companies surveyed 65 (-) EVA
MVA = MKT value capital = PV of all future EVA
MVA= EVA + EVA
.. N.
1
2
(1+K) (1+K)
Corp return
r =
MV
c
Capital

If

If

5%
15%

30%
15%

?
1
2
1

MV=0.33
Compare
MV=2

36

1)
2)
3)
4)
5)
6)
7)
8)

Basic Option Terminology

Call: buyer has the right to purchase underlying asset
Put: buyer has right to sell underlying asset
Writer(seller) of call option: Commitment to sell underlying asset
Writer of put option: the commitment to buy underlying asset
Writing a covered call: own the underlying stock
Writing a naked call: not owning the underlying stock
Buyer and sell have opposite price expectations
Premium is the price of the contract. (intrinsic + time)
Options may be: exercised, traded in the open market, allowed to expire worthless.

American vs. European options

1) An American option contract allows the owner to exercise the right to buy or sell the
underlying asset on or before the expiration date.
2) A European option contract allows the owner to exercise the right to buy or sell the
underlying asset on the expiration date only.
In general, American options are more valuable, due to increased flexibility.
Virtually all option contracts traded in the U.S are American option contracts.*
*Exception is foreign currency options and stock index options traded in the CBOE

37

To estimate fair value of C or P:

The Binomial Option Pricing Model (used for European)
European options: Can be exercised only on expiration date / stocks pay no dividends
American options: Can be exercised anytime during their life. BOPM can be used if modified /
pays dividend
125 P0=25

$100

Annualriskfree=8%

80 P0=0

To value a call option:

A portfolio with:
Stock
Bond
Call

Up
125
108.33
25

Down
80
108.33
0

Current price
100
100
?

Replicating the portfolio with appropriate combination of stock & bond can lead to a fair value
of option
EQ1: 125Ns + 108.33 Nb = 25
EQ2: 80Ns + 108.33 Nb = 0

Up
Down

(Ns: # of shares, Nb: bond)

Ns = 0.5556, Nb = -0.4103 x 100 = $14.53 @ time: current
V0 = 0.5556 x 100 0.4103 x 100 = $ 14.53
Buy stock
Short sell bond
V0 = NsPs +NbPb

(Ps: $stock, Pb: $bond)

Smart investor will recognize: once V0 is established then

1) If option overpriced say selling @ 20 the profit will be $5.47 (write the call for 20-14.53)
2) If option underpriced say selling @ 10 the profit will be $4.53( buy the call, short the
stock, invest in bond) 4.53 = [ -10 + (0.5556 x 100] 41.03
Hedge ratio: the expected change in the value of an option for every $1 change in price of stock,
the portfolio will change by Ns or 0.5556
The price of the Call will change by 0.5556 as well.

38

Shares to purchase

h= POU POD= 25-0 = 0.5556 or delta

PSU PSD 125-80

B = PV(hPSD-POD) = PV(0.5556 x 8- 0) = 44.45 = 41.03

1.0833.
V0 = hPs-B, h & B are hedge ratio & current value = 14.53 of bond (short position)
(S-sell bond)

$5.47 = $20 (0.5556 x 100) + $41.02

S.S.C

BuyS.

Payloan

Semiannual analysis
125

P0=25

100

P0=0

111.8

100

89.49

80

P0=0

The model requires year-end price, several answers or prices can be expected eg. 125, 100, 80 @
year end.
1) 111.8
Calc:

h=

25- 0 = 1
125-100

B = PV (1 x 100 0) = 100
1.0408
V0 = 1 x 111.8 96.08 = 15.72

1.04x10.4=1.0816
6M=1.0408
V0 = hPs - B
39

2) 89.44, Calc = 0, intuition!

3) If 100

111.8

P0=15.72

89.44

P0=0

@t=0 V0=9.89

We can have quarterly or monthly calculation

h=
15.72 0 =0.70
111.8 89.44
B = PV (0.703 x 89.44) = 80.4
V0 = 0.703 x 100 60.4 = 9.9

Put Option
H.R = 0 20 = -0.444
125-80

125

P0 = 0

80

P0 = 20

100

B = PV (-hPSU POD) = -51.28 (bond to be purchased)

To replicated the put option 1) S. Short 0.444 share of stock
2) Purchase bond 51.28
Put option value to replicate portfolio = -44.44 + 51.28 = $ 6.84
Vop=hPsB
=hPs(B)outflowforpurchase

Put-call Parity
The relationship of: European put & call hedge ratio: for same exercise price + Expiration date:
Hc 1 = hp , 0.5556 1 = 0-0.4444
Buy a put & the stock = Buy a call & invest PV of risk free assets
6.84 + 100 = 14.53 + 92.31
Pp+Ps =Pc+E

eRT

(Protectiveput;MarriedPut)

40

Stocks Risk from historical prices

Rt = ln

= Ln

Ex. Pst = 107, Pst-1= 105 (the 53 week)

Pst
Pst 1

107
105

Next week = 1, This week = 2

= 1.886% Return for one week

LN: natural logarithm

continuously compound return

Find 52 weekly returns n

1
n

Estimate stocks Ave. return RAV =

S2 = 1
n1

Variance:

(if 6 period - )

pre-period variance could be 1 week or one day

= 5252

- Some analysts give more weight to recent market value than historical data

Market consensus of a stocks risk

Implicit volatility: Pc = Vc option priced fairly in market
Mkt $ = fair value
For same expiration date find 0 ex:

35
45
50

1
2

Averagethen

By using Vc = N(d1)Ps E N(d2)

formula or groups of diff. expiration date estimate

eRT
See P695 Fig 206 for intrinsic call & time value of Black-Scholes value curve (Fig 208 for put)

Put call parity in Black-Scholes: Pp = E N(-d2) Ps N (-d2)

eRT

Pp = Pc + E Ps
eRT

Flex options: CBOE: contracts on indices (by institution), investor specify E&T
41