Which of the following is true: O The BSM model combined with the put call parity can be used to give the theoretical price of an American put option. One of the variables that influences the price of the option is the expected return on the stock. Since dividends could trigger an early exercise of an American call, the BSM formula dividend adjustment will provide the correct price of an American call. The BSM formula requires cumulative probabilities from the lognormal distribution. The BSM model may be used with currency options by replacing the dividend yield with the foreign interest rate.

Which of the following is true: O The BSM model combined with the put call parity can be used to give the theoretical price of an American put option. One of the variables that influences the price of the option is the expected return on the stock. Since dividends could trigger an early exercise of an American call, the BSM formula dividend adjustment will provide the correct price of an American call. The BSM formula requires cumulative probabilities from the lognormal distribution. The BSM model may be used with currency options by replacing the dividend yield with the foreign interest rate.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if So = (1 + r)^T
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.
4. Answer the following questions on exotic options: (a) Discuss the differences between a combination and a spread when constructing portfolios of options. (b) Define a long strangle and represent the profit function. (c) Design a forward contract on a stock with a particular delivery price and delivery date as a combination of options on the same underlying asset.
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.
Real Options & Game Theory: The value of a call option and a put option is influenced by the following variables: - Underlying asset value- Strike Price- Variance of Underlying asset- Time to Expiration What effect would an increase in each of these variables have on the value of a calloption and a put option?
The Black–Scholes option pricing model (OPM) was developed in 1973. The creation of the Black–Scholes OPM played a significant role in the rapid growth of options trading. The derivation of the Black–Scholes Option Pricing Model rests on the concept of a riskless hedge or leveraged buyout According to the Black–Scholes Option Pricing Model, as the variance, σ2σ2, increases, the value of the call option increase or decrease Happy Orange Storage Company has a current stock price of $28.00. A call option on this stock has an exercise price of $28.00 and 0.25 year to maturity. The variance of the stock price is 0.09, and the risk-free rate is 6%. You calculate d₁ to be 0.18 and N(0.18) to be 0.5714. Therefore, d₂ will be 0.03 and N(0.03) will be 0.5120. Using the Black–Scholes Option Pricing Model, what is the value of the option? (Note: Use 2.7183 as the approximate value of e.) $1.877 $1.408 $1.971 $1.689
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Explain in your own words what dynamic hedging is, and how a trader could profit by dynamically hedging an option if they have a forecast of volatility that is different to implied volatility.
If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.
Which of the following statements about European option contracts is TRUE? a. Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise. b. One can synthesise a long forward position in the underlying by being long a call and short a put c. A long call position and a short put position both involve buying the underlying and so are equivalent d. The price of an option can be obtained by computing the true probabilities of each state of nature, working out the expected option payoff across those states and then discounting back to the present.
The premium on a call option is primarily a function of the difference in spot price S relative to the strike price X, the length of time until expiration T, and the volatility of the currency o. C = f(S-X, T, o) For each characteristic of a call option, use the table to indicate whether that would lead to a higher call option premium or a low call 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 Call Option Premium O Lower Call Option Premium When using a call option to hedge payables in an international currency, a U.S. based MNC can lock in the to obtain the needed foreign currency. maximum minimum amount of dollars needed