Cash-Or-Nothing Call

  

This type of option is pretty simple to understand. We’re looking at a call, so the idea is that a stock price is supposed to go up.

A cash-or-nothing call pays out a fixed amount if and only if the stock hits a predetermined price. The “or-nothing” comes from the fact that, if the stock never hits that price, you get, well...nothing.

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Finance: What are the Return Dynamics of...137 Views

00:00

finance a la shmoop what are the return dynamics of investing in stocks versus

00:07

bonds well here's risk yeah and here's reward

00:12

take more of this and you get more of this but also this right stocks yeah [Man performs bike jump and holds trophy]

00:19

they're risky while they're risky in the short run

00:22

anyway here's a chart of the S&P 500 since the late 19th century Peaks

00:26

valleys Peaks valleys Peaks valleys it goes up a lot and down a lot but over

00:31

time it goes up a lot in fact over time the stock market has gone up by about 10

00:36

percent a year give or take and yeah there were long periods of time where [Man throws money into the air]

00:40

the market did way better than 10% and long periods where it did way worse and

00:44

don't forget you have to include dividend and dividend reinvestment when

00:48

you do these calculations all right so you can't invest in the stock market [Man giving lecture on stocks]

00:51

with a short term view really it's like navigating a ship with a magnifying

00:55

glass instead of a telescope if you're gonna take on the risk of the stock

00:59

market well you mitigate a lot of that risk by

01:02

just committing to own your basket of stocks for a very long time if you do

01:07

and history continues to repeat itself like a bad Thai food dinner well then [Person in a restroom cubicle]

01:12

you'll double your money about every 7 or 8 or 9 years something like that got

01:16

it okay the bond markets a completely different animal here our yields in the

01:20

early 1900's and here our yields around world war two and here our yields around

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the 70s well note the skyrocketing numbers here is the Jimmy Carter [Interest rate history graph]

01:29

Administration tried hard to fight and then stomp out inflation and they did

01:35

but oh the price anyway and since then bonds have been on a long slow ride down

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to the modern era where yields are almost nothing it's unprecedented to [A 100 dollar bill on the floor]

01:45

have such quote free money unquote but that's where we live in the world today

01:49

with government's desperate to stimulate inflation so that they can pay off their [Football being pumped up]

01:53

fixed debts easier so over the decades bond yields have come down and today the

01:58

ten-year t-bill yields about two or three percent depending on the weak you're

02:03

looking at it and corporate bonds yield modestly more because they're modestly more risky

02:08

they're yielding about four or five percent they're way safer both of these [A team of people waving]

02:12

then similar stocks that is government bonds and corporate bonds way way safer

02:17

than stocks less risk so what would you expect you know less reward and yeah cuz

02:23

bonds basically just boringly payoff only a very small handful of [Pennies drop]

02:27

bonds as a percentage of the total out there ever lose money by not paying

02:32

their full interest and their full principal generally on time where stocks

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lose money all the time so that's it more risk more reward so if you've got [Person stacking poker chips]

02:41

lots of time with your investments put it in the stock market it's gonna go up

02:45

at a much higher rate than the bond market but if you're thinking about

02:48

buying a house in eighteen months well you probably can't afford the market

02:52

risk so you know sit tight [Man standing outside of a house for sale]

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