Exam 20: Understanding Options

Figure 1 depicts the:

Define the term option.

The value of a put option is positively related to the: i.exercise price; II)time to expiration; III)volatility of the underlying stock price; IV)risk-free rate

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

The value of a put option at expiration equals the:

Define the term call option.

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

The value of a put option is negatively related to the: i.stock price; II)volatility of the underlying stock price; III)exercise price

Buying a stock and a put option,and lending the present value of the exercise price provide the same payoff as buying a call option.

Figure 4 depicts the:

If you write a put option,you acquire the right to buy stock at a fixed strike price.

Position diagrams and profit diagrams are one and the same.

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

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

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

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