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- Which of the following statements about European option contracts is TRUE? a. Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise. b. One can synthesise a long forward position in the underlying by being long a call and short a put c. A long call position and a short put position both involve buying the underlying and so are equivalent d. The price of an option can be obtained by computing the true probabilities of each state of nature, working out the expected option payoff across those states and then discounting back to the present.Which of the following statements about European option contracts is true? Question 2Answer a. Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise. b. The price of an option can be obtained by computing the true probabilities of each state of nature, working out the expected option payoff across those states and then discounting back to the present. c. A long call position and a short put position both involve buying the underlying and so are equivalent d. One can synthesise a long forward position in the underlying by being long a call and short a putQuestion E denotes the strike or exercise price below. For an American call option, A and B in the graph are Option value, C E Value of call option S-E OA) time value and intrinsic value. B) intrinsic value and time value. OC) in-the-money and out-of-the money. D) none of the above
- [S1] An American option would be more valuable than a European option. [S2] When the price of the underlyingasset is greater than the exercise price of the option, then a call option would be more valuable than a putoption. a. Only S1 is true. b. Only S2 is true. c. Both are true. d. Both are false.Discuss which of the following statements is true. O I. An American call option is more expensive than a European call option because of the time value of money. O II. 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. O II. An American put option is more expensive than a European put option because of the time value of money. O IV. An American call option is cheaper than a European call option because we lose the insurance value of the call if we exercise early.The value of a European put option can be either directly or inversely to a. Time to expiry b. volatility of the underlying
- i)identify, analyze and discuss the following characteristics of an American put option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. ii) analyze and discuss the following factors on an American put option: time to expiration, exercise price, interest rate, volatility, and dividends. iii) identify, analyze, and discuss the following characteristics of a European call option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. iv) analyze and discuss the following factors on a European call option: time to expiration, exercise price, interest rate,Below is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis. The solid line shows the profit/loss schedule for a: Question 8 options: put option in isolation (e.g. used for speculating that the pound will depreciate) None of the above covered call option (a call option is used as a hedge) covered put option (a put option is used as a hedge)Under the assumptions of the Black-Scholes model, which value does not affect the price of a European call option: Select one: a. the interest rate r b. the spot price S c. the strike price K d. the return of the stock µ e. the volatility of the stock σ
- 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. riskless profit). You may assume theinterest rate is r = 0 so that present value calculations are unnecessary.Tick all those statements on options that are correct (and don't tick those statements that are incorrect). a. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion. b. In general the equation S(T) + (K − S(T))† = (S(T) – K)+ + K is valid. An American put option should never be exercised before the expiry time. C. d. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. e. If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke¯T where T is the expiry time.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.