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1. Briefly explain a call short position.
2. Briefly explain the St- expectation of an investor who invested in option position: Put short
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Solved in 3 steps
- Equating theoretical option price and the market option price, we can solve for implied indicators. Which is appropriate to be used as a quote for option? a) Implied strike price b) Implied volatility c) Implied risk-free rate d) None of the aboveMy question is for a synthetic call option why do we need to borrow the present value of the strike price and what does it mean in a simple language explanation. Similarly why do we need to lend the present value of the stock at risk-free rate and what does it mean in simple language explanation? Please also clarify the significance of risk free rate? Why is it used in put call parity. Synthetic Call Option: If an investor believes that a call option is over-priced, then he/she can sell the call on the market and replicate a synthetic call. Borrow the present value of the strike price at the risk free rate and purchase the underlying stock and a put. Synthetic Put Option: Similar to the synthetic call option. A synthetic put can be created by re-arranging the put-call parity relationship, if the trader believes the put is overvalued. Synthetic Stock: A synthetic stock can also be created by rearranging the put-call parity identity. In this case, the investor will buy the…The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases. Select one: True False
- In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike priceWhen the price of the underlying financial instrument exceeds the exercise [strike] price of a call option, the option is said to be: A. ripe for a put.B. out of the running.C. in the money.D. dead on the money.Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity. 2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option. 3. When the exercise price increases, option prices increase. 4. As the risk-free rate increases, the value of the option increases.
- The maximum loss a seller of a stock put option can suffer is the ________. Select one: a. put premium b. strike price minus the value of the put c. stock price d. stock price minus the value of the put e. none of the aboveWhat effect does Stock Price have on call option price? What effect does Time expiration have on call option price? What effect does Risk-free rate have on call option price? What effect does Standard Deviation of Stock returns have on call option price?Describe the effect of a change in each of the following factors on the value of a calloption:1. Stock price2. Exercise price3. Option life4. Risk-free rate
- Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.Does at the money ,in the money, out of the money is used to tell about position of strike price in the market when buy or sell the option only (judge by comparing srike price and the spot price in market at that moment,Is it used to tell status of the option on expiration date by comparing srike price and the market price at expiration date or not, if not please explain to me by using some example to explain it.Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. When the exercise price increases, option prices increase. 2. An option is more valuable the longer the maturity. 3. The effect of the time to maturity on the option prices is indeterminate. 4. As the risk-free rate increases, the value of the option increases.