Concept explainers
a)
To discuss: Whether the long position in a call benefits when there is an increase in stock price.
Introduction:
Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date. There are two types of options, which are as follows:
- An option that buys an asset, referred to as a call option
- An option that sells an asset, referred to as a put option
b)
To discuss: Whether the short position in a call benefits when there is an increase in stock price.
c)
To discuss: Whether the long position in a put benefits when there is an increase in stock price.
Introduction:
Put option is a contract that is made by two investors to sell or buy an underlying asset. This option is constructed to mitigate the downside risk of an underlying asset.
d)
To discuss: Whether the short position in a put benefits when there is an increase in stock price.
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Corporate Finance
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- How does a fundamental analyst interpret the support level as the price range? Group of answer choices demand for a stock to decrease substantially. support level is not relevant supply of a stock to increase dramatically. demand for a stock to increase substantially.arrow_forwardWhich of the following strategy would you adopt if you expect the fall in prices of a stock? A. Buy a call B. Sell a call C. Sell a put D. Buy a futurearrow_forwardplease answer both. If a stock's fair return increases, what will happen to the stock's value? A. It will increase. B. It will not change. C. It will decrease. If the market risk premium rises, what will happen to the stock's price? A. It will not change. B. It will increase. C. It will decrease.arrow_forward
- If the stock price increases, the price of a put option on that stock ________ and that of a call option _________. decreases, increases decreases, decreases increases, decreases increases, increasesarrow_forwardA stock's required rate of return The part of a stock's risk that can be eliminated is know as _______________risk The portion of the stock's risk that cannot be eliminated is called ___________ risk Answer 2 Question 5 Market risk is also referred to as ________________ risk Answer 3 Question 5 The ______ coefficient measures a stock's relative volatility as compared with a stock's market index.arrow_forwardExplain why both put and call options are worth more if the stockreturn standard deviation is higher but put and call options areaffected oppositely by the stock price.arrow_forward
- Which of the following techniques is used to value stock options? a. Black-Scholes method b. Zero-coupon method c. Weighted-average method d. Expected earnings methodarrow_forwardWhich of the following statement(s) is(are) TRUE? (i) The valuation price of a stock primarily depends on expected future dividends to its shareholders and its required rate of return. (ii) An investor who intends to sell a stock after holding it for a short period will forgo all future dividends, thus will be willing to pay for a lower price for the stock compared to another investor who prefers to hold the share for a longer period. (iii) The valuation share price is positively related to the share's required rate of return.arrow_forwardWhy do call options with exercise prices greater than the price of the underlying stock sell for positive prices?arrow_forward
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