EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Textbook Question
Chapter 22, Problem 1CQ
Options What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?
Expert Solution & Answer
Summary Introduction
To determine: The meaning of call option, put option, circumstances under which they might be bought and whether call option or put option has greater potential profit.
Option:
Option refers to the formal contract between the issuer and buyer that provides right to buy or right to sell and not the obligation for a specific property or a commodity at a specified time period.
Answer to Problem 1CQ
- A call option is which does not carry any obligation on the right given to an individual to ‘purchase’ an asset at any particular price fixed or given point of time.
- A put option is the option which does not carry any obligation on the right given to an individual to ‘sell’ an asset at a particular fixed price on given point of time.
- When an increase in the price of the underlying asset is projected then it would be beneficial to buy a call option and when a decrease in the underlying asset is expected then purchase of put option is beneficial.
- Greater potential profit can happened in either of the cases depending upon the increase or decrease in the value of the underlying asset.
Explanation of Solution
- The call option is the option that provides a right not an obligation to sell an underlying asset anytime before expiration. So, when the price of the asset is increased over the period the buyer can be benefited by selling the asset at her price and when it is deceased he can choose not to sell and continue with holding it.
- The put option is the option that provides a right not an obligation to buy an underlying asset anytime before expiration. Son, when the price of the asset is decreased over the period, the buyer can be benefited by purchasing the asset at lower cost.
- The call option and put option both have similar potential profit depending upon the change in the value of the underlying asset, greater increase in asset would increase the potential profit in call option and greater decrease in asset would increase the potential profit in put option.
Conclusion
Thus, the potential profit in call and put option depends upon the change in the price of the underlying asset.
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Chapter 22 Solutions
EBK CORPORATE FINANCE
Ch. 22 - Options What is a call option? A put option? Under...Ch. 22 - Options Complete the following sentence for each...Ch. 22 - American and European Options What is the...Ch. 22 - Intrinsic Value What is the intrinsic value of a...Ch. 22 - Option Pricing You notice that shares of stock in...Ch. 22 - Options and Stock Risk If the risk of a stock...Ch. 22 - Option Risk True or false: The unsystematic risk...Ch. 22 - Prob. 8CQCh. 22 - Option Price and Interest Rates Suppose the...Ch. 22 - Contingent Liabilities When you take out an...
Ch. 22 - Options and Expiration Dates What is the impact of...Ch. 22 - Options and Stock Price Volatility What is the...Ch. 22 - Insurance as an Option An insurance policy is...Ch. 22 - Equity as a Call Option It is said that the equity...Ch. 22 - Prob. 15CQCh. 22 - Put Call Parity You find a put and a call with the...Ch. 22 - Put- Call Parity A put and a call have the same...Ch. 22 - Put- Call Parity One thing put-call parity tells...Ch. 22 - Two-State Option Pricing Model T-bills currently...Ch. 22 - Understanding Option Quotes Use the option quote...Ch. 22 - Calculating Payoffs Use the option quote...Ch. 22 - Two-State Option Pricing Model The price of Ervin...Ch. 22 - Two-State Option Pricing Model The price of Tara,...Ch. 22 - Put-Call Parity A stock is currently selling for...Ch. 22 - Put-Call Parity A put option that expires in six...Ch. 22 - Put-Call Parity A put option and a call option...Ch. 22 - Pot-Call Parity A put option and a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Delta What are the deltas of a call option and a...Ch. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Time Value of Options You are given the following...Ch. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Black-Scholes A call option has an exercise price...Ch. 22 - Black-Scholes A stock is currently priced at 35. A...Ch. 22 - Equity as an Option Sunburn Sunscreen has a zero...Ch. 22 - Equity as an Option and NPV Suppose the firm in...Ch. 22 - Equity as an Option Frostbite Thermalwear has a...Ch. 22 - Mergers and Equity as an Option Suppose Sunburn...Ch. 22 - Equity as an Option and NPV A company has a single...Ch. 22 - Two-State Option Pricing Model Ken is interested...Ch. 22 - Two-State Option Pricing Model Rob wishes to buy a...Ch. 22 - Two-State Option Pricing Model Maverick...Ch. 22 - Prob. 29QPCh. 22 - Prob. 30QPCh. 22 - Prob. 31QPCh. 22 - Two-State Option Pricing and Corporate Valuation...Ch. 22 - Black-Scholes and Dividends In addition to the...Ch. 22 - Prob. 34QPCh. 22 - Prob. 35QPCh. 22 - Prob. 36QPCh. 22 - Prob. 37QPCh. 22 - Prob. 38QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
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