FINANCIAL MANAGEMENT Financial Management



Financial Management

13-5

Often when a company fails to meet shareholder and investor expectations, the share price declines, so, if the stock had been trading at $ 20, the failure to meet shareholder expectations might drag the stock price down to $ 18. But if the strike price of the option is at, say, $ 10, you are still in the money.

Stock options are in essence the right to purchase a particular number of shares at a mentioned price called as the strike price but it should be in a specified time period. In addition to this, if at any specified point the existing stock price of a share is more than the strike price, the options have value. Moreover, both expectations of share holders and price of stock likely to vary, and not always in the similar way at the same time; therefore, it is relatively ordinary for the two to be at least for the moment out of alignment (Brigham and Ehrhardt, 2010).

Stock options give their owner the right to purchase a specified number of shares of the company that issued at a fixed price that is the exercise price and at a certain date. This type of operation, the stock options characterized its underlying these securities are traded in the market, so they can cover portfolios of risk exposure, if you have purchased shares of potential lowered their price and want to buy the securities in its price rises. As for the usefulness of such options, beyond cover any fluctuations that may occur in the price, it also gives the possibility of investment operations or speculation pure and simple (Brigham and Ehrhardt, 2010). Since the contracts performed on a large number of titles in a fixed price and a lower initial outlay than the ...