Homework Answers
The correct answer is A ( Volatility Decreases)
Explanation:
The American put option on a stock is likely to be exercised early when the volatility is likely to decrease because as the maturity approaches the premium on put option is likely to decrease after which the buyer will have less payoff that will lead to loss of capital.
So he will more likely to exercise the option at the earliest.
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Which of the following describes a situation where an American put option on a stock becomes...
Question 1 - 35 Points Consider a European put option on a non-dividend-paying stock where the...
Question 1 - 35 Points Consider a European put option on a non-dividend-paying stock where the stock price is $15, the strike price is $13, the risk-free rate is 3% per annum, the volatility is 30% per annum and the time to maturity is 9 months. Consider a three-step troc. (Hint: dt = 3 months). (a) Compute u and d. (b) Compute the European put price using a three-step binomial tree. (c) If the option in (b) is American instead...
2. An American put option can be exercised: a. b. c. d. e. At any time...
2. An American put option can be exercised: a. b. c. d. e. At any time on or before the expiration date. Only on the expiration date. Any time in the indefinite future. Only after the dividend has been paid. None of the above. 3. A European call option can be exercised: a. Any time in the future. b. Only on the expiration date. c. If the price of the underlying asset declines below the exercise price. d. Immediately after...
Problem 1. 1. Calculate the price of a six-month European put option on a non-dividend-paying stock...
Problem 1. 1. Calculate the price of a six-month European put option on a non-dividend-paying stock with an exercise price of $90 when the current stock price is $100, the annualized riskless rate of interest is 3%, and the volatility is 40% per year. 2. Calculate the price of a six-month European call option with an exercise price on this same stock a non-dividend-paying stock with an exercise price of $90. Problem 2. Re-calculate the put and call option prices...
A put option with the strike price of $23 on the stock of Green Lake Corp. expires today. The current price of the stock is $24.50. Which one of the following best describes this option? exercised at-...
A put option with the strike price of $23 on the stock of Green Lake Corp. expires today. The current price of the stock is $24.50. Which one of the following best describes this option? exercised at-the-money in-the-money out-of-the-money
Q5. Based on the same information given in Question 4, which of the following is likely...
Q5. Based on the same information given in Question 4, which of the following is likely to increase the the early exercise premium for the put option? An decrease in risk-free rate the stock starts to pay a dividend An increase in stock price None of above Q4. We observe a $25 price for a non- dividend paying stock. We have an American put option that has two years to mature, the periodically compounded risk-free interest rate is 8%, the...
hint（think about the conditions under which early exercise of an American put option is optimal. What...
hint（think about the conditions under which early
exercise of an American put option is optimal. What would happen to
a European put option in this condition）
De Ingler utan nat of a European call option None of the above are true, since the decision to exercise the option early lies with the writer of the option QUESTION 5 Which of the following is true about the premium of a European put option in relation to the option's intrinsic value? The...
B. decreases by approximately 4.3%. C. decreases by approximately $1.72. Answer C The put option will...
B. decreases by approximately 4.3%. C. decreases by approximately $1.72. Answer C The put option will decrease in value as the underlying stock price increases: -0.43 x S4 S1.72. 100,000 Stocks Call Option sold has the following details. The stock price is $49, the strike price is $50, the risk-free rate is 5%, the stock price volatility is 20%, and the time to exercise is 20 weeks or 20/52 year. Table below shows Delta, Gamma, Vega, Theta and Rho for...
2. Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and...
2. Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and a European-style option with the same strike price, expiration, and underlying stock. Franklin believes that the European-style option will have a higher premium than the American-style option. a. Critique Franklin’s belief that the European-style option will have a higher premium. Franklin is asked to value a one-year European-style call option for Abaco Ltd. Common stock, which last traded at $43.00. He has collected the...
2. (18 points) Consider a European put option where the stock price is 40, the strike...
2. (18 points) Consider a European put option where the stock price is 40, the strike price is $42.50, and the risk free rate is 4% per annum. (a) If the life of the option is 6 months, and there are two time steps (3 months each), what is the value of the put if the volatility is 38%? (b) (12 points) What is the value of the put if it is an American option and has a dividend yield...
10. Use DerivaGem to complete this problem where you have an option on a non-dividend paying...
10. Use DerivaGem to complete this problem where you have an option on a non-dividend paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months: a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What...
Question 1 - 35 Points Consider a European put option on a non-dividend-paying stock where the stock price is $15, the strike price is $13, the risk-free rate is 3% per annum, the volatility is 30% per annum and the time to maturity is 9 months. Consider a three-step troc. (Hint: dt = 3 months). (a) Compute u and d. (b) Compute the European put price using a three-step binomial tree. (c) If the option in (b) is American instead...
2. An American put option can be exercised: a. b. c. d. e. At any time on or before the expiration date. Only on the expiration date. Any time in the indefinite future. Only after the dividend has been paid. None of the above. 3. A European call option can be exercised: a. Any time in the future. b. Only on the expiration date. c. If the price of the underlying asset declines below the exercise price. d. Immediately after...
Q5. Based on the same information given in Question 4, which of the following is likely to increase the the early exercise premium for the put option? An decrease in risk-free rate the stock starts to pay a dividend An increase in stock price None of above Q4. We observe a $25 price for a non- dividend paying stock. We have an American put option that has two years to mature, the periodically compounded risk-free interest rate is 8%, the...
hint（think about the conditions under which early
exercise of an American put option is optimal. What would happen to
a European put option in this condition）
De Ingler utan nat of a European call option None of the above are true, since the decision to exercise the option early lies with the writer of the option QUESTION 5 Which of the following is true about the premium of a European put option in relation to the option's intrinsic value? The...
B. decreases by approximately 4.3%. C. decreases by approximately $1.72. Answer C The put option will decrease in value as the underlying stock price increases: -0.43 x S4 S1.72. 100,000 Stocks Call Option sold has the following details. The stock price is $49, the strike price is $50, the risk-free rate is 5%, the stock price volatility is 20%, and the time to exercise is 20 weeks or 20/52 year. Table below shows Delta, Gamma, Vega, Theta and Rho for...
2. (18 points) Consider a European put option where the stock price is 40, the strike price is $42.50, and the risk free rate is 4% per annum. (a) If the life of the option is 6 months, and there are two time steps (3 months each), what is the value of the put if the volatility is 38%? (b) (12 points) What is the value of the put if it is an American option and has a dividend yield...
10. Use DerivaGem to complete this problem where you have an option on a non-dividend paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months: a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What...
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