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?
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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.
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How can she earn the time premium? I am very confused. How can she sell it without buying first?
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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 dI have been working on the question below and I'm stuck on how to finish it up. I have provided what I've done so far. Is what I've done so far correct? And how do I finish up the problem? Here is the question: Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (i.e. risk-less profit). You may assume the interest rate is r=0 so that the present value calculations are unnecessary. My work so far: There is an opportunity for arbitrage if we can create a portfolio that initially (time t=0) generates a zero net cash flow or a cash inflow, but still produce a positive or zero cash inflow at the time of expiration. Assume we are going to short sell one call option C, and buy one stock S. Consider the cash flows at time t=0.Cash flow of selling one call option: +CCash flow of buying one stock: -STherefore, since C>S, we have an initial cash inflow of C-S>0. We will now…Imagine you have K 6.5 million at your disposal to invest in your various options of investments. However, you have no indication on how to effectively go about it and accordingly make a quality decision, but you have some indistinct ideas. One option available to you is to build a block of flats or invest this lump sum in undisclosed type of investments. You are also privy to the fact that building flats will yield the same returns if you invested in these other unrevealed investment options available over same life span [you will need to mention them in (d)]. Assuming in the economy you are domiciled in, the prevailing interest rates are pegged at 35 percent and to complete a block of flats it will take you 3 years, of which inflation is at 25 percent. Further you should note that other factors of investment are only varied in long run to increase your available lump sum of investment, which may be constrained by the rising inflation as time rolls on. Further, by applying relevant…
- Imagine you have K 6.5 million at your disposal to invest in your various options of investments. However, you have no indication on how to effectively go about it and accordingly make a quality decision, but you have some indistinct ideas. One option available to you is to build a block of flats or invest this lump sum in undisclosed type of investments. You are also privy to the fact that building flats will yield the same returns if you invested in these other unrevealed investment options available over same life span [you will need to mention them in (d)]. Assuming in the economy you are domiciled in, the prevailing interest rates are pegged at 35 percent and to complete a block of flats it will take you 3 years, of which inflation is at 25 percent. Further you should note that other factors of investment are only varied in long run to increase your available lump sum of investment, which may be constrained by the rising inflation as time rolls on. REQUIRED C), by applying…Imagine you have K 6.5 million at your disposal to invest in your various options of investments. However you have no indication on how to effectively go about it and accordingly make a quality decision, but you have some indistinct ideas. One option available to you is to build a block of flats or invest this lump sum in undisclosed type of investments. You are also privy to the fact that building flats will yield the same returns if you invested in these other unrevealed investment options available over same life span Assuming in the economy you are domiciled in, the prevailing interest rates are pegged at 35 percent and to complete a block of flats it will take you 3 years, of which inflation is at 25 percent. Further you should note that other factors of investment are only varied in long run to increase your available lump sum of investment, which may be constrained by the rising inflation as time rolls on. REQUIRED a) Calculate the net present value of your investment sum…Which of the following statements is FALSE? A. You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always positive. B. When you do not have the option to wait, it is optimal to invest in any positive−NPV project. C. One way to see why you sometimes choose not to invest in a positive−NPV project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait. D. When you have the option of deciding when to invest, it is usually optimal to invest only when the NPV is positive but close to zero.
- Discuss which of the following statements is true. I. An American call option is cheaper than a European call option because we lose the insurance value of the call if we exercise early. II. An American call option is more expensive than a European call option because of the time value of money. III. An American call option is more expensive than an American put option because call options give the right to buy the stock and not to sell it. IV. An American put option is more expensive than a European put option because of the time value of money.I asked the question below earlier today, and got a response, but I didn't understand it. I'm sure the response was well written and clear, but I have a very limited background in this area and probably need more of a layman's terms explanation! Thanks. Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (ie. riskless profit). Assume the interest rate r=0 so present value calculations are unnecessary.Ms Afiqah is a financial advisor. Ms Ratna approached herfor financial advisory services while she wanted to make along-term investment. She wanted to invest in low-riskassets, and she is happy with a minimum return. Ms Afiqahpromised Ms Ratna that Ms Ratna would get a fixed returnof 3% per annum if she invests in a fixed-return assetthrough Ms Afiqah as an agent. Ms Ratna agreed to theinvestment deal and started to pay RM500 per month to MsAfiqah for investing in a fixed-return asset. However,instead of investing the funds directly to any fixed assetinstrument, Ms Afiqah transferred the money to her share- trading account. Ms Afiqah purchased share using thatmoney under her name and made a gain of more than 10%per annum while returning only 3% to Ms Ratna every year. a) Critically evaluate Ms Afiqah’s action based on theconcept of fiduciary duty. (minimum 200 words) b) Analyse in what ways Islamic code of conducts can solvethe issues in the above scenario. (minimum 300 words)
- which one is correct please confirm? Q2" Which of the following strategies will be profitable if the price of the underlying asset is expected to decrease? (There may be more than one correct response.) Buying a put Buying a call. Selling a put Selling a call.Assume that you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive P1000. If the second outcome occurs, you receive no money. If the third outcome occurs, you must pay P100. Given that you can be characterized as risk neutral, how much would you pay to take this risk? Would you willing to pay more or less this opportunity?An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. Economic Condition Investment Poor Average Good Excellent (S1) (S2) (S3) (S4) A 50 75 20 30 B 80 15 40 50 C -100 300 -50 10 D 25 25 25 25 What decision would be made under minimax regret?