Referring to put-call parity, which one of the following alternatives would allow you to create (own) a synthetic European call option? Sell the stock, buy a European put option on the same stock with the same exercise price and the same maturity, invest an amount equal to the present value of the exercise price in a pure-discount riskless bond Buy the stock, sell a European put option on the same stock with the same exercise price and the same matunty: short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond Buy the stock, buy a European put option on the same stock with the same exercise price and the same maturity; short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond

Referring to put-call parity, which one of the following alternatives would allow you to create (own) a synthetic European call option? Sell the stock, buy a European put option on the same stock with the same exercise price and the same maturity, invest an amount equal to the present value of the exercise price in a pure-discount riskless bond Buy the stock, sell a European put option on the same stock with the same exercise price and the same matunty: short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond Buy the stock, buy a European put option on the same stock with the same exercise price and the same maturity; short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 6MC

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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. b. By observing the prices of call and put options on a stock, one can recover an estimate of the expected stock return. 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. d. In a binomial world,if a stock is more likely to go up in price than to go down, an increase in volatility would increase the price of a call option and reduce…
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
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.
State and prove the Put-Call Parity Theorem that gives the relation between a European Call and a Put option price where the options are written on the same stock, same time to maturity and have the same exercise price.
Which of the following can be used to create a long position in a European put option on a stock? Buy a call on the stock and short the stock Sell a call option on the stock and buy the stock Sell a call option on the stock and sell the stock Buy a call option on the stock and buy the stock
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 put
Which of the following can be used to create a long position in a European put option on a stock? A. Sell call on the stock and buy stock B. Sell call option on the stock and sell stock C. Buy call option on the stock and buy stock D. Buy call on the stock and short stock.
1. 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.
My 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…
European plain vanilla call options with strikes 30 and 35 on the same non- dividend paying asset with spot price $ 35 are trading for $ 11.50 and $ 7, respectively. Does arbitrage exist, and if so, how do you take advantage of it?
Is the Black-Scholes-Merton options pricing model well suited to pricing an American call option on a dividend paying stock?
Select all of the following statements that accurately compare or contrast forwards and options: Group of answer choices Taking naked long positions in either a call or forward will lead to an overall long position in the underlying security. Options and forwards always have identical payoffs if the spot price remains the same. Both options and forwards can be used to reduce exposure to foreign exchange risk. Going long a naked put option and going short a naked forward both cause unlimited liability. Both options and forwards require the payment of a premium at the initiation of the contract. Forward contracts impose obligations on both parties in the transaction. Options contracts only impose an obligation on one party.