Tick all those statements on options that are correct (and don't tick those statements that are incorrect). O a. In general the equation S(T) + (K — S(T))* = (S(T) – K) + K is valid. O b. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. Oc. An American put option should never be exercised before the expiry time. Od. If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke T where T is the expiry time. Oe. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion.

Tick all those statements on options that are correct (and don't tick those statements that are incorrect). O a. In general the equation S(T) + (K — S(T))* = (S(T) – K) + K is valid. O b. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. Oc. An American put option should never be exercised before the expiry time. Od. If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke T where T is the expiry time. Oe. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion.

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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Similar questions

Suppose that the risk-free interest rate is zero. Would an American put option ever be exercised early? Explain.
Which of the below statements is false about real options? A. Real options increase firm value B.Investing in a project can be priced as an American call option C.Abandoning a project can be priced as an American put option D.Growth options have no impact on the market value of the firm
4. 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)
In our study of Real Options, we learned about the many benifits of Real Options. Of the below, which is FALSE? O A. Given the option to delay, an investment that currently has a negative NPV can have a positive value. O B. As the level of uncertainty increases, the benefit of waiting is diminished. OC. In a real option analysis, the dividends correspond to any value from the investment that we give up by waiting. O D. By delaying an investment, we can base our decision on new information.
3. A bear spread payoff has the form g(ST) = max(K₂- ST, 0) - max(K₁ – ST, 0), where 0 < K₁ < K₂. (a) (b) Sketch the payoff diagram. Use the general formula for the European option pricing function to find the time-zero option price of a bear spread.
Below is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis. The solid line shows the profit/loss schedule for a: Question 8 options: put option in isolation (e.g. used for speculating that the pound will depreciate) None of the above covered call option (a call option is used as a hedge) covered put option (a put option is used as a hedge)
2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) 16.00 32.00 40.00 44.00 48.00 Strike Price ($) 24.00 24.00 24.00 24.00 24.00 Exercise Value ($) Market Price of Option ($) 1.56 10.10 0.00 20.00 18.40 22.60 28.00 Time Value ($) 2.10 2.40 4.00 After two weeks, the stock price of ABC Corp. increases to…
Which one of the following statements is true? Multiple Choice O O O O A call with a strike price of $25 and a stock price of $23 has positive intrinsic value. A European style option is more valuable than an American style option. An American style out-of-the-money call option can have a positive value. A $40 put option has more intrinsic value than a $50 put option on the same underlying asset. The time value of an option is equal to the intrinsic value minus the option premium.
Which of the following inputs is not required to price option using the Black‐Scholes model? a) the asset price b) the time to maturity c) the asset’s risk premium d) the risk‐free rate of interest
[S1] The longer the time to expiration, the less valuable the option is. [S2] The more volatile the price of theunderlying asset, the less valuable the option is. a. Only S1 is true. b. Only S2 is true. c. Both are true. d. Both are false.
(a) What is the expected shape of a futures curve for cotton (a storable commodity)? What about for live hogs (a non-storable commodity)? (b) Explain why a rational economic agent may still choose to hold stocks even if the expected return on stocks is negative.
Which of the following is TRUE? An American call option on a stock should never be exercised early O An American call option on a stock should not be exercised early when no dividends are expected O It can be optimal to exercise early an American call option on a stock when no dividends are expected and there is no liquidity or portfolio rebalancing need. O An American call option on a stock should be exercised early when no dividends are expected

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