INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 21, Problem 51PS
Summary Introduction
To Show that the prices of the put and call will be equal if
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Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
Group of answer choices
True
False
fill the missing words:
a. For ( ) options, when the spot price is ( ) than(or equal to)the exercise price, then profit/loss equals the premium.
b. For ( ) options, when the spot price is ( ) than (or equal to) the exercise price, then the profit/loss will be equal to the option premium.
Consider a forward contract on a stock that pays dividends at specific times ti, where 0 < t1 < t2 < ... < tn < T.
Suppose that the dividend is a fixed amount: Di at fixed times ti. Show that in this case, the forward contract price is given by
Chapter 21 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
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- We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.arrow_forwardSuppose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what would be more expensive: a call option on X or Y? Please discuss.arrow_forwardUnder which of the following circumstances would you want to buy a stock? Select one: a. The HPR is greater than zero. b. A stock's holding period return is greater than the CAPM return c. A stock's CAPM return is greater than its holding period return d. The stock's price is higher than its valuearrow_forward
- In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike pricearrow_forwardWhy do call options with exercise prices greater than the price of the underlying stock sell for positive prices?arrow_forwardWhat is Put-Call Parity (select the best answer)? Group of answer choices Put-Call Parity suggests that puts and calls have equal, but opposite, values. Uses arbitrage arguments showing that a portfolio of the underlying stock plus a put has the exact same payoffs as a portfolio of a risk-free bond plus a call. Thus, those two portfolios must have equal value. Uses arbitrage arguments to show that the value of a Put is equal to the value of a Call plus the Stock Price. Uses arbitrage arguments to show that the value of a Call is equal to the value of the underlying stock plus the value of a Put.arrow_forward
- Differentiate among the expected rate of return (r⁄), the requiredrate of return (r), and the realized, after-the-fact return (r) on astock. Which must be larger to get you to buy the stock, r⁄or r?arrow_forwardSuppose that put options on a stock with strike prices $18 and $20 cost $2 and $3.50, respectively. How can the options be used to create a bull spread? Construct atable that shows the profit and payoff for the spread.arrow_forwardIf a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero. True or False?arrow_forward
- Consider a call and a put options with the same strike price and time to expiry. Given that the strike price is exactly equals to the forward price, then: A. Put and call have same premium B. The premium of the put is equal to the forward price C. The premium of the put is equal to the premium of the call plus the present value of the strike D. The premium of the call is equal to the forward pricearrow_forwardA) Explain the relationship between strike prices and implied volatilities under a price jump scenario. B) How does a dividend payment impact the option price?arrow_forwardSelect all that are true with respect to option valuation: Group of answer choices The holder of a call option has rights to the dividend on the underlying stock. The holder of a put option has rights to the dividend on the underlying stock. A call option on a dividend paying stock would be worth less than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend). A call option on a dividend paying stock would be worth more than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend).arrow_forward
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