A European call and a European put on a stock have the same strike price and time tomaturity. At 13:00 on a certain day, the price of the call is $5 and the price of the putis $6. At 13:01 news reaches the market that has no effect on the stock price orinterest rates, but increases volatilities. As a result, the price of the call changes to$5.50. Which of the following is correct?O The put price increases to $7.00O The put price increases to $6.50O It is possible that there is no effect on the put priceO The put price decreases to $5.50

Volatility of a stock the price of derivative options are directly proportional to each other.

Answered: A European call and a European put on a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Given the following information, price of a stock: strike price of a six-month call: market price of the call: strike price of a six-month put: market price of the put: The maximum the seller of the put can lose is $ $102 $100 $6 $100 $3
Suppose that on 27 October 2022, Wall Street Journal in New York presents the following price for 27 March 2023 call options on Microsoft stock (in $ USA) strike 75 80 85 price 11 7.96 5.5 while the annual interest rate is 4% per year. On this date (27 October 2022) the Microsoft stock was trading at $81.625. Suppose we decide that the volatility of the market is 30%. Should you buy the call option as the European one with strike price $80? Justify your answer.
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