Exercise price
The price at which an option's holder may buy the underlying (a call) or sell it (a put). Where the underlying stands relative to it decides whether exercising is worth anything.
Where you will meet it
Exercise price appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Work out what a call option pays at expiry
“At expiry a call option's payoff is max(0, S - X), where S is the price of the underlying and X the exercise price.”
- Explain how a financial statement model projects share-based compensation expense and share count, and how these feed into valuation
“For options, the treasury stock method adds shares equal to options multiplied by one minus exercise price over share price (the period's average price, for diluted EPS).”
- Use an interest rate tree to work out what a callable or putable bond is worth
“At each node from which the option can be exercised, compare the value before any coupon then due with the exercise price.”
- Tell apart an option's payoff and the profit it earns
“The payoff of a long call at expiry is the greater of zero and the underlying price less the exercise price — it can never be negative, which is the whole point of buying optionality.”
Practise it
Practise exercise price until it is automatic: questions that explain every wrong option.
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