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.