G Revisit Choose the best option Duestion 1 • Buying oil producer stocks and selling airtine stocks O Buying US Dollar and selling Euro O Seling oil producer stocks and buying airline stocks O Seling US Dollar and buying Euro Alarge retinery in tSaud Arabia is hit by an explosion. Which trade would most likely be pruttatle Clear Response
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- . I own a call (put) on Euros. If the value of Euros goes up, then the _________. a) the value of call options will increaseb) the value of call options will decreasec) the value of put options will increased) the value of put options will decreasee) it depends on whether the call option is American style, or European stylef) the value of call and put options will both remain the sameg) a and ch) a and di) b and cj) b and dProblem 4c: State whether the following statements are true or false. In each case, provide a brief explanation. c. An investor would like to purchase a European call option on an underlying stock index with a strike price of 210 and a time to maturity of 3 months, but this option is not actively traded. However, two otherwise identical call options are traded with strike prices of 200 and 220 respectively, hence the investor can replicate a call with a strike price of 210 by holding a static position in the two traded calls.Problem 4a: State whether the following statements are true or false. In each case, provide a brief explanation. a. In a risk averse world, the binomial model states that, other things being equal, the greater the probability of an up movement in the stock price, the lower the value of a European put option.
- Imagine a situation where European options on some underlying stock have the following relationship. p+S > c+ K*exp(-rT). (a) Describe the arbitrage opportunities that are available with an example. (b) Now change those options to American-style options. Does the arbitrage strategy still work? Explain your answer.D3 show the solution in details Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500. The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e. u = 1.6 and d = 1/u = 0.625). The current interest rates are i€ = 3% and are i£ = 4%. Choose the answer closest to yours. the answer is A) €3,275MCQ & True/false : International Financial Management: 1. A put option on Canadian dollars with a strike price of $.60 is purchased by a speculator for a premium of $.03 per unit. If the Canadian dollar’s spot rate is $.55 at the time the options is exercised, what is the net profit per unit to the speculator? (a) $0.20 (b) $0.00 (c) $0.03 (d) $0.05 2. A call option on Canadian dollars with a Strike price of $.60 is purchased by a speculator for a premium of $.05 per unit. If the Canadian dollar’s spot rate is $.65 at the time the options is exercised, what is the net profit per unit to the speculator? (a)$0.03 (b) $0.05 (c) $0.02 (d) $0.00
- 4. Introduction to real options Consider the following statement about real options: Decision tree analysis is more commonly used in valuing securities than real assets. True or False: The preceding statement is correct. True False Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Flexibility option Abandonment option Expansion option Timing option Consider the following example: Smoltz Motors has plants around the country that specialize in specific models of cars. Smoltz has determined that lower demand has led the firm’s inventory of SUVs to be too high. Smoltz wants to stop production for its SUVs and focus on its sedans. This example describes a real option to (expand/ abandon) . Please do not answer in excel, use math formulas Thank you!Mf2. Assume a one-period binomial model in which the initial stock price is S = 60 and in each period the stock price can go either up by a factor of u = 7 3 or down by a factor of d = 2 3 . Assume that the simple interest rate over one time period is r = 1 3 . (a) Determine the fair price of the European put option with strike K = 60. (b) Assume that instead of the price determined in part (a), the European call option is trading at 11. Prove that there is an arbitrage and explain how the arbitrage can be achieved1. Consider a family of European call options on a non - dividend - paying stock, with maturity T, each option being identical except for its strike price. The current value of the call with strike price K is denoted by C(K) . There is a risk - free asset with interest rate r >= 0 (b) If you observe that the prices of the two options C( K 1) and C( K 2) satisfy K2 K 1<C(K1)-C(K2), construct a zero - cost strategy that corresponds to an arbitrage opportunity, and explain why this strategy leads to arbitrage.
- 6. The ABC Company has to make a choice between two strategies: Strategy 1: Is expected to result in a market price now of $100 per share of common stock and a price of $120 five years from now. Strategy 2: Is expected to result in a market price now of $80 and a price of $140 five years from now. What do you recommend? Assume that all other things are unaffected by the decision being considered.Q2: You have been working as a treasurer at Citibank for the past five years and have previously used swaps, futures and forward contracts to mitigate risk. However, you have never used options so you are interested in exploring the market. You want to start with small transactions and are considering purchasing a European put on a share for $3. The stock is 42 and the strike price is $40. Furthermore, you are also considering purchasing a call option with the same terms as the put option. Consider the following questions: Under what circumstances does the investor make a profit? Under what circumstances will the options be exercised? Draw diagrams showing the variation of the investor’s profit.Q. A friend of yours tells you she holds an American call option that is very deep-in-the-money. She tells you she’s going to exercise it now and cash in on her winnings. Is this a wise move to make? - The answer to this question is given below but I don't understand the explanation, please clearly explain in simple terms. No, she should sell it. Sell now you get intrinsic value PLUS time value, rather than exercise now which leads to just S-X.
