Exam 20: Understanding Options

Put-call parity can be used to show:

The Position diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is (like):

Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by:

An option that can be exercised any time before expiration date is called:

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs)

Define the term "option."

The owner of a regular exchange-listed put-option on the stock:

The value of a put option is negatively related to: I. stock price II. risk-free rate III. exercise price

For European options, the value of a call plus the present value of the exercise price is equal to:

The writer (seller) of a regular exchange-listed call-option on the stock:

All things being equal, the closer an option gets to expiration, the lower the option price.

Why would an option holder almost never exercise an option early?

For European options, the value of a put is equal to:

Discuss the factors that determine the value of a call option.

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

Briefly explain what is meant by "protective put."

If the stock price follows a random walk successive price changes are statistically independent. If σ2 is the variance of daily price change, and there are t days until expiration, the variance of the cumulative price changes is:

An increase in the stock price results in an increase in the call option price.

An investor can get downside protection by buying a stock and a put option.

An investor, in practice, can buy: I. an option on a single share of stock II. options that are in multiples of 100 III. a minimum order of 100 options on a share of stock