Exam 13: Risk and the Pricing of Options

Suppose a stock is currently trading for $23,and in one period it will either increase to $30 or decrease to $20.If the one-period risk-free rate is 5%,what is the price of a European call option that expires in one period and has an exercise price of $25?

Using an option to reduce the risk of a portfolio is called ________,while using options to bet on the direction of the market or an asset is called ________.

The value of a call option ________ with the risk-free rate,and the value of a put option ________ with the risk-free rate.

The payoff to the holder of a call option is given by:

A one-year European call option on ABX corporation with a strike price of $50 is currently trading for $4.30,and a one-year European put option on ABX with the same strike price is currently trading for $1.47.If the stock pays no dividends and the risk free rate is 4% per year,what is the current price of ABX stock?

The price of a European put option on Scotiabank stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.60.If the exercise price of the options is $45,and the risk-free rate is 5%,what must be the current price of Scotiabank stock?

________ options allow the holder to exercise the option on any date up to and including the expiration date.

What is a put option?

The value of an otherwise identical call option is ________ if the stock price is ________.

Hedging is accomplished by holding contracts or securities whose payoffs are positively correlated with some risk exposure that already exists.

A put option on a stock has an exercise price of $31.If the stock price at expiration is $29.45,what is the option payoff for a long put position?

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -Assume you want to sell 20 call option contracts with an exercise price closest to being at-the-money and that expires January 2011.The current price that you would receive for such a contract is:

The price at which the holder of an option buys or sells a share of stock when the option is exercised is called the ________ price.

Debt holders can be thought as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.

Use the figure for the question(s) below. -What is the long position of an options contract?

The holder of a put option has

The price of a European call option on RBC stock with an exercise price of $85 and one year to expiry is trading at $3.15.The current price of the stock is $81.25,and the risk-free rate is 2.5%.With no arbitrage,what must be the price of a European put on RBC with an exercise price of $85?

The Black-Scholes formula gives the price of an American call option.

Consider the following equation: C = P + S - PV(K)- PV(Div) In this equation,what does the term K represent?

Suppose a stock is currently trading for $35,and in one period it will either increase to $38 or decrease to $33.If the one-period risk-free rate is 6%,what is the price of a European put option that expires in one period and has an exercise price of $36?