Fin 533 final chapter 20
Determine the value of a call option on PJY inc shares at expiration if the market price of PJY is $33 and the exercise price is $35.
$0 This is an out-of-the-money call option that will expire worthless
Warrant
-they are often issued in conjunction with another security -there is a cash flow to the firm when the warrant is exercised -their exercised results in the creation of new shares
Options traded on exchanges
-they are standardized by allowable expiration dates and exercise prices -their uniformity increases market depth, lowers trading costs, and increases liquidity
An option that can be exercised before and up to its expiration date is called a(n) ________ option.
American
An option that can be exercised only on its expiration date is called a(n) _____ option.
European
Longer-term options traded with expirations ranging up to several years are called
LEAPS
Which combination of securities constitutes a protective put?
Owning the stock and buying a put option
An investor who regularly writes naked, deep-out-of-the-money puts on an index would be expected to earn _____ gains and _____ losses,
a series of small, occasional large
Securities providing payoffs that depend on or are contingent on the values of other assets such as commodity prices, bond and stock prices, or market-index values are referred to as _______ securities.
derivative
The owner of a convertible bond typically has the right but not the obligation to
exchange the bonds for shares of stock
What are derivative securities?
futures, options, swaps
For a put option on a given security with a given expiration date, the value of the put is _____ when the exercise price is ______.
higher, higher lower, lower
An option whose exercise would produce a positive payoff is said to be _____.
in the money
A bond that has a call provision is one in which the
issuer can repurchase the bonds
For a call option on a given security with a given expiration date, the value of the call is ______ when the exercise price is _______.
lower, higher higher, lower
American options are ____ valuable than European options because they offer ______ flexibility regarding when the can be exercised.
more, more
A loan for which the lender cannot obtain payment beyond the collateral in event of default is a(n) _______ loan.
nonrecourse
The price paid for an option is referred to as its
premium
An investor who regularly writes covered calls on an asset receives ______ and gives up ______.
premiums, potentially large gains in the asset
The purpose of a straddle is to
profit from expected volatillity
The ____ of a call at expiration equals its ______ less its ______.
profit, payoff, premium
Which portfolios provide a payoff with a guaranteed minimum value and unlimited upside potential?
protective put, call and T-bills
The equation representing the equilibrium relationship between put and call prices is given by the
put-call-parity theorem
If an investor believes that a share of stock is overvalued, the investor might
sell a call, buy a put
A combination of two or more call options (or two or more puts) on the same stock with differing exercise prices or times to maturity is a(n)
spread
The combination of buying both a call and a put on the same asset, each with the same exercise price and expiration date is a(n)
straddle