Exam 20: Understanding Options

Figure-1 depicts the:

Figure-2 depicts the:

Buying a call option, investing the present value of the exercise price in T-bills, and short selling the underlying share is the same as:

Buying the stock and the put option on the stock provides the same payoff as:

The value of a call option increases with higher volatility of the stock prices.

Define the term "put option."

The buyer of a call option has the right to exercise, but the writer of the call option has:

A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?

Which of the following features increase(s) the value of a call option?

The value of a call option, beyond the stock price less the exercise price, is most likely to be realized when the option is:

The writer of a put option loses if the stock price declines.

The value of a call option is negatively related to: I. Exercise price II. Risk-free rate III. Time to expiration

Explain the main differences between the position diagrams and the profit diagrams.

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

Briefly explain the relationship between risk and option values.

Given the following data: Expiration = 6 months; Stock price = $80; exercise price = $75; call option price = $12; risk-free rate = 5% per year. Calculate the price of an equivalent put option using put-call parity:

In June 2007, an investor buys a put option on Genentech stock with an exercise of price Of $75 and expiring in January 2009. If the stock price in June 2007 is $80, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS

Which of the following investors would be happy to see the stock price rise sharply? I) Investor who owns the stock and a put option II) Investor who has sold a put option and bought a call option III) Investor who owns the stock and has sold a call option IV) Investor who has sold a call option

Briefly explain what is meant by put-call parity?

If the stock makes a dividend payment before the expiration date then the put-call parity is: