Exam 13: Risk and the Pricing of Options

Suppose a stock is currently trading for $12,and in one period it will either increase to $15 or decrease to $8.If the one-period risk-free rate is 4%,what is the price of a European call option that expires in one period and has an exercise price of $7?

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

A European option on a stock is more valuable than an otherwise similar American option on the same stock.

How does option pricing theory help explain why equity holders have an incentive to take on negative-NPV,high-volatility investments?

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?

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?

Use the table for the questions below Consider the following information on options from the CBOE for Rackspace. -Assume you want to buy five call option contracts with an exercise price closest to being at-the-money and that expires December 2010.The current price that you would have to pay for such a contract is:

Luther Industries is currently trading for $27 per share.The stock pays no dividends.A one-year European put option on Luther with a strike price of $30 is currently trading for $2.60.If the risk-free interest rate is 6% per year,then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:

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

The value of an otherwise identical call option is ________ if the strike price the holder must pay to buy the stock is ________.

The price of a European put option on Potash Corp stock with an exercise price of $48 and one year to expiry is trading at $4.15.The current price of the stock is $45,and the risk-free rate is 3%.With no arbitrage,what must be the price of a European call on Potash Corp with an exercise price of $48?

How many of the January 2009 call options are in-the-money?

When is an option in-the-money?

The price of a European put option on Power Financial Corp stock with one year to expiry is trading at $0.55,and the price of a European call option is trading at $2.15.If the exercise price of the options is $19,and the risk-free rate is 3.5%,what must be the current price of Power Financial stock?

When a company writes a call option on new stock in the company,it is called a:

What is the short position of an options contract?

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

How many of the January 2009 call options are out-of-the-money?

The binomial option pricing model calculates the option price by creating a replicating portfolio out of a risk-free bond and the underlying stock.

The price of a European put option on Bombardier stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.50.If the stock is currently trading at $4.75,and the risk-free rate is 4%,what is the exercise price of the options?