Exam 20: Understanding Options

Position diagrams and profit diagrams are one and the same.

Explain the difference between a European option and an American option.

Briefly explain how position diagrams are useful?

Options can have a value even when the stock is worthless.

The higher the underlying stock price: (everything else remaining the same)

Options written on volatile assets are worth more than options written on safer assets.

Figure-3 depicts the:

For an European option: Value of call + PV(exercise price) = Value of put + share price.

If the risk-free interest rate increases:

Buying an in the money option will almost always produce a profit.

The higher the underlying stock price: (everything else remaining the same)

The value of a put option is positively related to: I. Exercise price II. Time to expiration III. Volatility of the underlying stock price IV. Risk-free rate

The two principal options exchanges in the U.S.A. are: I. International Securities Exchange II. New York Stock Exchange III. NASDAQ IV. Chicago Board of Options Exchange

The value of a call option is positively related to the following: I. underlying stock price II. risk-free rate III. time to expiration IV. volatility of the underlying stock price

Define the term "call option."

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

Briefly explain how an option holder gains from the volatility of the underlying stock price.

In June 2007, an investor buys a call option on Amgen stock with an exercise of price of $65 and expiring in January 2009. If the stock price in June 2003 is $60, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

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