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? 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.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 4BIC

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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 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.
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 is correct? A) The gamma of a long position in a European option takes the highest value for deep in-the-money options. B) The delta of a short position in a European put is between -1 and 0. C) The delta of a long position in a deep in-the-money European put is close to zero. D) The gamma and the vega of a long position in a European put are positive. Please explain and justify your choice.
Referring to put-call parity, which one of the following alternatives would allow you to create (own) a syntheticEuropean 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 thepresent 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 presentvalue 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 presentvalue of the exercise price worth of a pure-discount riskless bond
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.
There are two styles of option available: European and american a) the american style is normally more expensive than the european style for the same asset, exercise price and date b) options exchanges either offer european or american but not both c) the american style optionsare more lucrative for hedgers d) all of the above
a)describe the major differences between forward contracts and option contracts. b)discuss an arbitrage opportunity when an option is mispriced. c) identify, analyze, and discuss the following characteristics of an American call option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. d) analyze and discuss the following factors on an American call option: time to expiration, exercise price, interest rate, volatility, and dividends.
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,
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…
Consider the following portfolio: a newly entered-into long forward contract on an asset and a long position in a European put option on the asset with the same maturity as the forward contract and a strike price that is equal to the forward price of the asset at the time the portfolio is set up. Show that it has the same value as a European call option with the same strike price and maturity as the European put option. Deduce that a European put option has the same value as a European call option with the same strike price and maturity when the strike price for both options is the forward price.
An option that gives the option buyer the right to buy the commodity or financial instrument specified in the contact at the exercise price is called:* A. an American option B. a European option C. a call option D. a put option