INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Question
Chapter 2, Problem 3CP
Summary Introduction
To select: The correct option for the most risky transaction which is undertake in the stock index option market where stock market is expecting increases in sustainability is to be determined.
Introduction : The call option is a contract in which the holder has the right to buy the underlying asset. The call option is a type of the option contract. The option contract is of two types − call option and put option.
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Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Choose the correct.a. Write a call option.b. Write a put option.c. Buy a call option.d. Buy a put option.
____________ is the most profitable transaction to undertake in a stock-index option, if the stock market is expected to fall substantially after the transaction is completed.
Which of the following events are likely to increase the market value of a call option onan ordinary share? Explain.a) An increase in the stock price.b) An increase in the volatility of the stock price.c) An increase in the risk-free rated) A decrease in the time until the option expires
Chapter 2 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 2 - Prob. 1PSCh. 2 - Prob. 2PSCh. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Prob. 5PSCh. 2 - Prob. 6PSCh. 2 - Prob. 7PSCh. 2 - Prob. 8PSCh. 2 - Prob. 9PSCh. 2 - Prob. 10PS
Ch. 2 - Prob. 11PSCh. 2 - Prob. 12PSCh. 2 - Prob. 13PSCh. 2 - Prob. 14PSCh. 2 - Prob. 15PSCh. 2 - Prob. 16PSCh. 2 - Prob. 17PSCh. 2 - Prob. 18PSCh. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Prob. 21PSCh. 2 - Prob. 22PSCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CP
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- Which of the following events are likely to increase the market value of a calloption on a common stock? Explain.a. An increase in the stock’s priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expiresarrow_forwardWhat is the difference between the long and the short positions in a contract for the future delivery of the S&P 500 stock index? If you expect stock prices to fall, do you buy or sell stock index futures?View Solution: What is the difference between the long and the shortarrow_forwardOptions and Stock Risk If the risk of a stock increases, what is likely to happen to the priceof call options on the stock? To the price of put options? Why?arrow_forward
- Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potential for divergence of calculated option values from observed market prices.a. What is the expected effect on the value of a call option on common stock if the volatility of the underlying stock price decreases? If the time to expiration of the option increases?b. Using the Black-Scholes option-pricing model and an estimate of stock return volatility, Weber calculates the price of a 3-month call option and notices the option’s calculated value is different from its market price. With respect to Weber’s use of the Black-Scholes option-pricing model,i. Discuss why the calculated value of an out-of-the-money European option may differ from its market price.ii. Discuss why the calculated value of an American option may differ from its market price.arrow_forwardWhat would be a simple options strategy to exploit your conviction about the stock price's future movements? Group of answer choices Long Straddle Short Straddle Bull Spread Bear Spreadarrow_forwardBoth call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity. 2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option. 3. When the exercise price increases, option prices increase. 4. As the risk-free rate increases, the value of the option increases.arrow_forward
- If you expect a stock market downturn, one potential defensive strategy would be to __________. Group of answer choices buy stock index options sell foreign exchange futures buy stock index futures sell stock index futuresarrow_forwardWhich of the following is not a determinant of the value of a call option in the Black-Scholes model? A. The interest rate. B. The exercise price of the stock. C. The price of the underlying stock. D. The beta of the underlying stock. Need typed answer only.Please give answer within 45 minutesarrow_forwardBased on Torelli’s scenarios, what is the mean return of GMS stock? What is the standard deviation of the return of GMS stock? 2. After a cursory examination of the put option prices, Torelli suspects that a good strategy is to buy one put option A for each share of GMS stock purchased. What are the mean and standard deviation of return for this strategy?arrow_forward
- Which of the following statements are TRUE about the following stock option spreads? I. If there is no call option supply in the market. You may still be able to build a bull spread with put options. II. If you are a speculator and short on a butterfly spread, you are betting on an increase in stock price to be clustered around the strike price. III. If you are a speculator and long on a straddle, you will lose the most if the stock price is at the strike price. IV. If you are a speculator and long on a strip spread, you will gain more when the stock price goes above the strike price than when it goes below.arrow_forwardState 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…arrow_forwardWhat is the value of a call option or a put option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?arrow_forward
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