Why greater volatility or longer maturity period provides a higher premium return on both call and put options? Context Introduction: Call options: They provide the owner of the options the right to buy an asset in the future at a mutually agreed upon price. They have a predetermined expiry date as per the contract; the asset can be brought any time before the expiry date or at it. The owner must pay a premium fee to exercise the call which gives the right to buy till the expiry of the option. Put options: The owner of a put has the right to sell their underlying assets at pre-decided date and time. Usually, investors buy a put when they expect the value of the underlying value of the asset to come down, so they have the right but not the obligation to exercise the right. They are good in speculating and give a high return when sold at a short selling period. Price of the contract is determined by the price of the put, profit derived is known as the intrinsic value of the contract, the extrinsic value is the risk taken due to market volatility.

Question

Want to see the full answer?

Answer 1

Question

100%

Chapter 14, Problem 5Q

To determine

Why greater volatility or longer maturity period provides a higher premium return on both call and put options?

Context Introduction:

Call options:

They provide the owner of the options the right to buy an asset in the future at a mutually agreed upon price. They have a predetermined expiry date as per the contract; the asset can be brought any time before the expiry date or at it. The owner must pay a premium fee to exercise the call which gives the right to buy till the expiry of the option.

Put options:

The owner of a put has the right to sell their underlying assets at pre-decided date and time.

Usually, investors buy a put when they expect the value of the underlying value of the asset to come down, so they have the right but not the obligation to exercise the right. They are good in speculating and give a high return when sold at a short selling period. Price of the contract is determined by the price of the put, profit derived is known as the intrinsic value of the contract, the extrinsic value is the risk taken due to market volatility.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Summarise the case for government intervention in the education market

Should Maureen question the family about the history of the home? Can Maureen access public records for proof of repairs?

3. Distinguish between a direct democracy and a representative democracy. Use appropriate examples to support your answers. [4] 4. Explain the distinction between outputs and outcomes in social service delivery [2] 5. A R1000 tax payable by all adults could be viewed as both a proportional tax and a regressive tax. Do you agree? Explain. [4] 6. Briefly explain the displacement effect in Peacock and Wiseman's model of government expenditure growth and provide a relevant example of it in the South African context. [5] 7. Explain how unbalanced productivity growth may affect government expenditure and briefly comment on its relevance to South Africa. [5] 8. South Africa has recently proposed an increase in its value-added tax rate to 15%, sparking much controversy. Why is it argued that value-added tax is inequitable and what can be done to correct the inequity? [5] 9. Briefly explain the difference between access to education and the quality of education, and why we should care about the…