INVESTMENTS (LOOSELEAF) W/CONNECT
INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 21, Problem 2CP
Summary Introduction

To select:

A correct option for the open interest on a futures contract

Introduction:

Maintenance margin is the minimum amount of equity that a future margin account may have and usually set at 75% to 85% of the initial margin.

When a futures contract is purchased, a minimum deposit is required known as Initial margin.

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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.
Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.
Both 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.
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