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- The value of a European put option can be either directly or inversely to a. Time to expiry b. volatility of the underlying4. Which of the below represents the value of an American option in each state? max(Payoff if exercised, Value if held) Payoff if exercised Risk-neutral probability min(Payoff if exercised, Value if held)What is a financial option? What is the single most important characteristic of an option?
- What does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio be changed by taking a position in the underlying asset? Explain your answer.8. Option prices are a function of the spot price, the strike price, interest rates, time to expiration, and the volatility of the underlying. Assume all of these inputs stay the same, except for one. Raising which of these inputs increases the value of all four types of options including: European Calls, European Puts, American Calls, and American Puts?Under the assumptions of the Black-Scholes model, which value does not affect the price of a European call option: Select one: a. the interest rate r b. the spot price S c. the strike price K d. the return of the stock µ e. the volatility of the stock σ
- What is a REIT What are the advantages and disadvantages of REITs List and Describe the different types of REITs What is an OPTION Differentiate between a PUT and a CALL OPTION List and Describe the different types of OPTIONS What is a REPO What are the advantages and disadvantages of REPOS List and Describe the different types of REPOS What is the formula for calculating REPO RATE Define (a) Market Risk (b) Interest Rate Risk (c) Commodity Risk (d) Currency RiskThe premium on a put option is primarily a function of the difference in spot price S relative to the strike price X, the time until maturity T, and the volatility of the currency o. P = f(S-X, T, o) For each characteristic of a put option, use the table to indicate whether that would lead to a higher put option premium or a lower put option premium (all else equal). Characteristic A lower spot price relative to the strike price A shorter time before expiration A higher level of volatility for the currency Higher Put Option Premium Lower Put Option Premium When using a put option to hedge receivables in an international currency, a U.S. based MNC can lock in the receive. minimum maximum amount of dollars it willDefine a call option’s exercise value. Why is the market price of acall option always above its exercise value?
- Define a call option’s exercise value. Why is the actual market price of a call optionusually above its exercise value?Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (i.e. risk-less profit). You may assume the interest rate is r=0 so that the present value calculations are unnecessary.Option Price and Interest Rates Suppose the interest rate on T-bills suddenly andunexpectedly rises. All other things being the same, what is the impact on call option values? Onput option values?
