The exotic option with payoff max[average(St)-K, 0], where t belongs in time interval [0, T], is an Asian option. Granting Asian options as executive compensation can better align the interests of executives and share holders than call options, because Asian options is path dependent, which prevents executive' earning management immediate before the option expiration day. O True O False

The exotic option with payoff max[average(St)-K, 0], where t belongs in time interval [0, T], is an Asian option. Granting Asian options as executive compensation can better align the interests of executives and share holders than call options, because Asian options is path dependent, which prevents executive' earning management immediate before the option expiration day. O True O False

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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.
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held untilmaturity. Under what circumstances will the holder of the option make a profit? Underwhat circumstances will the option be exercised? Draw a diagram illustrating how the profitfrom a long position in the option depends on the stock price at maturity of the option. Suppose that a European put option to sell a share for $60 costs $8 and is held untilmaturity. Under what circumstances will the seller of the option (the party with the shortposition) make a profit? Under what circumstances will the option be exercised? Draw adiagram illustrating how the profit from a short position in the option depends on thestock price at maturity of the option.
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
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…
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.
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 only
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?
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.
Assume that Sara gets into a short European put option to sell one share of stock Y for $66 that costs $7 and is held until maturity. Under what circumstances will Sara, the seller of the option (the party with the short position), make a profit? Under what circumstances will the option be exercised (from long position perspective)? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.
. 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 d
financial risk management 1. The buyer of the option is not obligated to complete the deal and will do so only if changes in price make it profitable to do so. ( True/ False) 2. An American options can be exercised:a, at any time prior to expiryb. Nonec. only on the date of expiryd. on the third Friday of each monthe. in the same manner as an European option

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