Ch20

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise​ date?

Equal to the exercise price regardless of the stock price

Suppose the underlying stock pays a dividend before the expiration of options on that stock. This​ will: ​I) increase the value of a call​ option; ​II) increase the value of a put​ option; ​III) decrease the value of a call​ option; ​IV) decrease the value of a put option

II and III only

A call option has an exercise price of​ $150. At the option expiration​ date, the stock price could be either​ $100 or​ $200. Which investment would combine to give the same payoff as the​ stock?

Lend PV of​ $100 and buy two calls Value of two​ calls: 2(200​ - 150)​ = 100 or value of two calls​ = 2(100​ - 150)​ = 0​ (not exercised); payoff​ = 100​ + 100​ = 200, or payoff​ = 0​ + 100​ = 100.

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise​ price? (Ignore transaction​ costs.)

The exercise price

A put option gives the owner the​ right:

but not the obligation to sell an asset at a given price

Buying a call​ option, investing the present value of the exercise price in​ T-bills, and​ short-selling the underlying share is the same​ as:

buying a put

Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy​ by:

buying the underlying stock and buying a put

Buying a stock and a put​ option, and lending the present value of the exercise price provide the same payoff as buying a call option.

f

Relative to the underlying​ stock, a call option always​ has:

higher beta and a higher standard deviation of return

Buying the stock and the put option on the stock provides the same payoff​ as:

investing the present value of the exercise price in​ T-bills and buying the call option on the stock

A profit diagram implicitly neglects the time value of money.

t

All else​ equal, options written on volatile assets are worth more than options written on safer assets.

t

All else​ equal, the closer an option gets to​ expiration, the lower the option price.

t

If the stock price follows a random​ walk, successive price changes are statistically independent. If​ σ^2 is the variance of the daily price​ change, and there are t days until​ expiration, the variance of the cumulative price change​ is:

​(σ^2) ×​ (t)

Consider the following data for a European​ option: Expiration​ = 6​ months; Stock price​ = $80; Exercise price​ = $75; Call option price​ = $12;​ Risk-free rate​ = 5% per year. Using​ put-call parity, calculate the price of a put option having the same exercise price and expiration date.

$5.19 Value of put​ = value of call​ - share price​ + PV of exercise price ​= 12​ - 80​ + 75/(1.05^0.5)​ = 12​ - 80​ + 73.19​ = $5.19.

Which of the following statements is​ FALSE? A. A financial option contract gives the writer the right​ (but not the​ obligation) to purchase or sell an asset at a fixed price at some future date. B. A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price. C. A put option gives the owner the right to sell the asset. D. A call option gives the owner the right to buy the asset.

A. A financial option contract gives the writer the right​ (but not the​ obligation) to purchase or sell an asset at a fixed price at some future date.