Assuming both are priced fairly, when is buying a call option less risky than buying the underlying stock? The market is less volatile than normal Never: Buying an option is always riskier than buying a stock The option is at the money The option is deeply out of the money
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- tHE CORRECT OPTION IS C but what is wrong with the last statement? The short position in the same call option has a zero value for all stock prices equal to or less than the exercise price. - Please explain how this statement is true? please give a detailed explanation and in simple terms.Which of the following statement is most accurate in analyzing a stock? If the security has a lower intrinsicvalue than that of the current price_________________a. The stock is good to buyb. Buy more stocks it will definitely go upc. Buy more stocks when price increasesd. The stock is not good to buye. None of the above.We understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value?
- The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $28.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 8.00 28.00 0.00 1.56 16.00 28.00 2.10 2.10 20.00 28.00 2.40 2.40 22.00 28.00 0.00 2.60 24.00 28.00 4.00 4.00 After two weeks, the stock price of ABC Corp. increases to $24.96. Suppose you purchased the shares for $16.00 and then sell the…The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56 40.00 30.00 12.10 2.10 50.00 30.00 22.40 2.40 55.00 30.00 25.00 27.60 60.00 30.00 34.00 4.00 After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell…Which of the following statements is correct? As the volatility of the stock price increases (all else remaining unchanged), both European calls and puts become less valuable. The seller of an option can choose whether to post a margin or not. Consider a call and a put which are both written on the same asset, and have the same strike price and the same time-to-maturity. It is possible for the call and the put to be out-of-the-money at the same time. The intrinsic value of a European option is the value it would have if the time-to-maturity was zero. Please explain and justify your choice using your own words.
- Suppose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what would be more expensive: a call option on X or Y? Please discuss.Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potential for divergence of calculated option values from observed market prices.a. What is the expected effect on the value of a call option on common stock if the volatility of the underlying stock price decreases? If the time to expiration of the option increases?b. Using the Black-Scholes option-pricing model and an estimate of stock return volatility, Weber calculates the price of a 3-month call option and notices the option’s calculated value is different from its market price. With respect to Weber’s use of the Black-Scholes option-pricing model,i. Discuss why the calculated value of an out-of-the-money European option may differ from its market price.ii. Discuss why the calculated value of an American option may differ from its market price.The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. The following table presents the data on ABC Corp.’s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $14.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 32.00 14.00 18.00 19.56 64.00 14.00 52.10 2.10 80.00 14.00 68.40 2.40 88.00 14.00 74.00 76.60 96.00 14.00 86.00 4.00 After two weeks, the stock…
- Which of the following investors would be happy to see the stock price rise sharply?I) An investor who owns the stock and a put option;II) An investor who has sold a put option and bought a call option;III) correct for projects that have average risk compared to the firm's other assets. An investorwho owns the stock and has sold a call optionIV) An investor who has sold a call optionA) I and II onlyB) III and IV onlyC) III onlyD) IV onlyat any point of time there are multiple exercise prices and maturity dates offered on a particular stock option a) the higher the exercise price the more expensive the put options are b) there are no relationships between option value and maturity dates c)the longer the maturity date the less expensive the options are d) the lower the exercise price the less expensive the call options areWe understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value? (40-60 words)