Exam 3: Principles of Option Pricing

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20. The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated. -Suppose the stock is about to go ex-dividend in one day.The dividend will be $4.00.Which of the following calls will you consider for exercise?

The maximum value of a call is the stock price.

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20. The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated. -What is the time value of the November 115 put?

The put-call parity rule for American options is stated as equalities.

The time value of an option is also referred to as the

The effect of volatility on a call/put's price is

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20. The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated. -What is the time value of the December 105 put?

The spread between the prices of two European puts,alike in all respects except exercise price,cannot exceed the difference in their exercise prices.

Transactions to exploit pricing errors in the put-call parity relationship are called conversions and reversals.

Which of the following statements about an American call is not true?

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20. The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated. -From American put-call parity,what are the minimum and maximum values that the sum of the stock price and December 110 put price can be?

Holding everything else constant,put options are more expensive in periods of high interest rates.

A situation in which early exercise of an American put can be justified is

The price of a call option is directly related to interest rates.

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20. The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated. -What is the time value of the November 110 call?

The difference between a Treasury bill's face value and its price is called the

Selling short a risk-free bond is equivalent to borrowing.

The value of a European call is higher for lower strike prices.

A stock is equivalent to a long call,short put and long risk-free bond.

An American put might be exercised early even when there are no dividends on the underlying stock.