Question 1

To show how to calculate the hedge ratio, we use notation that includes the following: ________.

Accepted Answer

A) S = current asset price and C = current price of a call option. This is the correct notation commonly used in finance to represent the current asset price and the current price of a call option, respectively, which are essential components in calculating the hedge ratio.

Question 2

For ________ options, as the time remaining until expiration decreases, the option price approaches its intrinsic value.

Accepted Answer

American options can be exercised at any time before expiration, so as the time remaining until expiration decreases, the option price approaches its intrinsic value.

Question 3

The option price will change as the price of the ________. For a ________, as the price of the underlying asset increases (all other factors constant), the option price increases. The opposite holds for a ________.

Accepted Answer

The option price will change as the price of the underlying asset changes. For a call option, as the price of the underlying asset increases, the option price increases. The opposite holds for a put option. Therefore, the correct choice is B, where call option corresponds to an increase in the price of the underlying asset, and put option corresponds to a decrease in the price of the underlying asset.

Question 4

Factors influence the price of an option include the ________.

Accepted Answer

The answer of Factors influence the price of an option...

Question 5

It can be shown that the put-call parity relationship for options where the underlying asset makes cash distributions and where the time value of money is recognized is: Put option price - Call option price = ________.

Accepted Answer

The put-call parity formula for options with cash distributions and time value of money is: Put option price - Call option price = Present value of strike price + Present value of cash distribution - Price of underlying asset. This is because the cash distribution has a present value component that must be factored in. The put-call parity formula takes this into account, as well as the time value of money and the price of the underlying asset. Option A, B, and D are incorrect because they do not properly account for the present value of the cash distribution.

Question 6

If the strike price for a call option is $10 and the current asset price is $9, the intrinsic value is ________.

Accepted Answer

The intrinsic value of a call option is the difference between the stock price and the strike price, only if the stock price is higher than the strike price. In this scenario, the stock price is $9 and the strike price is $10, so the intrinsic value is $0. However, if the stock price were to rise to $11, the intrinsic value would be $1 ($11 - $10). Since the current stock price is below the strike price, there is no intrinsic value.

Question 7

The ________ is fixed for the life of the option. All other factors equal, the lower the strike price, the ________ the price for a call option. For put options, the ________ the exercise price, the higher the option price.

Accepted Answer

The strike price (or exercise price) is fixed for the life of the option. For call options, the lower the strike price, the higher the price of the option because it's more likely to end in the money. For put options, the higher the strike price, the higher the option price for the same reason.

Question 8

An option buyer can realize the value of a position taken in the option by ________.

Accepted Answer

An option buyer can realize the value of a position by exercising the option, which means choosing to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset at the agreed-upon price.

Question 9

Because of the assumptions required for the binomial model described above, such models may have limited applicability to the pricing of options on ________.

Accepted Answer

The answer of Because of the assumptions required for the...

Question 10

If the strike or exercise price for a put option is $75, and the current asset price is $75, and the market value of the put option is $77. What is the time premium of the put option?

Accepted Answer

The time premium is the difference between the market value and intrinsic value of an option. Intrinsic value is the difference between the strike price and the current asset price, which in this case is zero. Therefore, the entire market value of $77 is due to time premium. Since the strike price and current asset price are the same, the option is at-the-money and the time premium is equal to the market value. Thus, the time premium is $77 - $75 = $2. The correct choice is B.

Question 11

To determine the value of the ________, H, we must know Cᵤ and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.

Accepted Answer

The hedge ratio (H) is determined by knowing the values of Cᵤ (the price of the call option in the up state) and Cd (the price of the call option in the down state), which are related to the difference between the price of the asset and the strike price in two possible states. This concept is fundamental in options pricing, particularly in the binomial options pricing model.

Question 12

To derive a one-period binomial option pricing model for a call option, we begin by constructing a portfolio consisting of ________.

Accepted Answer

To derive a one-period binomial option pricing model for a call option, a portfolio is constructed by taking a long position in a certain amount of the asset (buying the stock) and a short call position in the underlying asset (selling a call option). This combination allows for the creation of a riskless portfolio, where the returns from the portfolio are certain, regardless of the stock's price movement, enabling the calculation of the call option's fair value.

Question 13

All other factors equal, the ________ the expected volatility (as measured by ________) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it.

Accepted Answer

The more expected volatility (as measured by the standard deviation) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it. Therefore, the greater the expected volatility, the higher the value of the option, and the option writer would demand a higher premium for taking on the risk.

Question 14

Suppose a portfolio consisting of the long position in the asset and the short position in the call option is riskless and will produce a return that equals the risk-free interest rate. A portfolio constructed in this way is called ________.

Accepted Answer

A portfolio constructed in this way is called a hedged portfolio as it involves using the short position in the call option to offset the riskiness of the long position in the underlying asset. This results in a riskless portfolio that earns the risk-free interest rate. The other options are not appropriate descriptions for this type of portfolio.

Question 15

________ on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, ________ on the underlying asset tend to increase the price.

Accepted Answer

Cash payments, such as dividends, on the underlying asset decrease the price of a call option because they make holding the asset more attractive due to the additional income. For put options, cash payments increase the price because the underlying asset's value decreases with each cash payment, making the put option more valuable.

Question 16

________ is an important relationship between the price of a call option and the price of a put option on the same underlying instrument, with the same strike price and the same expiration date.

Accepted Answer

Put-call parity is an important relationship between the price of a call option and the price of a put option on the same underlying instrument, with the same strike price and the same expiration date. It states that the price of a call option minus the price of a put option equals the current stock price minus the strike price discounted to present value. This relationship is used to identify arbitrage opportunities and ensure that options are priced correctly.

Question 17

To derive the price of a ________, we can rely on the basic principle that the hedged portfolio, being riskless, must have a return equal to the risk-free rate of interest.

Accepted Answer

The answer of To derive the price of a ________,...

Question 18

All other factors constant, the higher the short-term, risk-free interest rate, the ________ the cost of buying the underlying asset and carrying it to the ________ of the call option.

Accepted Answer

The higher the short-term, risk-free interest rate, the greater the cost of carrying the underlying asset. This increased cost of carrying the asset to the expiration date will increase the cost of holding the call option, resulting in a higher price for the option.

Question 19

The ________ is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the ________.

Accepted Answer

The option price is composed of the intrinsic value (the difference between the current stock price and the strike price) and the premium over intrinsic value, which is referred to as the time value or time premium. This premium is paid for the potential for the option to increase in value before expiration due to factors like volatility and time decay.

Question 20

The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, ________.

Accepted Answer

The first blank is asking for the term that refers to the economic value of an option if it is exercised immediately, which is the intrinsic value. The second blank is asking for what happens if no positive economic value would result from exercising immediately, and in this case, the intrinsic value would be zero. Therefore, B is the correct answer.

Quiz 28: Pricing of Futures and Options Contracts

To show how to calculate the hedge ratio, we use notation that includes the following: ________.

For ________ options, as the time remaining until expiration decreases, the option price approaches its intrinsic value.

The option price will change as the price of the . For a , as the price of the underlying asset increases (all other factors constant) , the option price increases. The opposite holds for a .

Factors influence the price of an option include the ________.

It can be shown that the put-call parity relationship for options where the underlying asset makes cash distributions and where the time value of money is recognized is: Put option price - Call option price = ________.

If the strike price for a call option is $10 and the current asset price is $9, the intrinsic value is ________.

The is fixed for the life of the option. All other factors equal, the lower the strike price, the the price for a call option. For put options, the the exercise price, the higher the option price.

An option buyer can realize the value of a position taken in the option by ________.

Because of the assumptions required for the binomial model described above, such models may have limited applicability to the pricing of options on ________.

If the strike or exercise price for a put option is $75, and the current asset price is $75, and the market value of the put option is $77. What is the time premium of the put option?

To determine the value of the ________, H, we must know Cᵤ and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.

To derive a one-period binomial option pricing model for a call option, we begin by constructing a portfolio consisting of ________.

All other factors equal, the the expected volatility (as measured by ) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it.

Suppose a portfolio consisting of the long position in the asset and the short position in the call option is riskless and will produce a return that equals the risk-free interest rate. A portfolio constructed in this way is called ________.

on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, on the underlying asset tend to increase the price.

________ is an important relationship between the price of a call option and the price of a put option on the same underlying instrument, with the same strike price and the same expiration date.

To derive the price of a ________, we can rely on the basic principle that the hedged portfolio, being riskless, must have a return equal to the risk-free rate of interest.

All other factors constant, the higher the short-term, risk-free interest rate, the the cost of buying the underlying asset and carrying it to the of the call option.

The is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the .

The of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, .

Quiz 28: Pricing of Futures and Options Contracts

To show how to calculate the hedge ratio, we use notation that includes the following: ________.

For ________ options, as the time remaining until expiration decreases, the option price approaches its intrinsic value.

The option price will change as the price of the ________. For a ________, as the price of the underlying asset increases (all other factors constant) , the option price increases. The opposite holds for a ________.

Factors influence the price of an option include the ________.

It can be shown that the put-call parity relationship for options where the underlying asset makes cash distributions and where the time value of money is recognized is: Put option price - Call option price = ________.

If the strike price for a call option is $10 and the current asset price is $9, the intrinsic value is ________.

The ________ is fixed for the life of the option. All other factors equal, the lower the strike price, the ________ the price for a call option. For put options, the ________ the exercise price, the higher the option price.

An option buyer can realize the value of a position taken in the option by ________.

Because of the assumptions required for the binomial model described above, such models may have limited applicability to the pricing of options on ________.

If the strike or exercise price for a put option is $75, and the current asset price is $75, and the market value of the put option is $77. What is the time premium of the put option?

To determine the value of the ________, H, we must know Cᵤ and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.

To derive a one-period binomial option pricing model for a call option, we begin by constructing a portfolio consisting of ________.

All other factors equal, the ________ the expected volatility (as measured by ________) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it.

Suppose a portfolio consisting of the long position in the asset and the short position in the call option is riskless and will produce a return that equals the risk-free interest rate. A portfolio constructed in this way is called ________.

________ on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, ________ on the underlying asset tend to increase the price.

________ is an important relationship between the price of a call option and the price of a put option on the same underlying instrument, with the same strike price and the same expiration date.

To derive the price of a ________, we can rely on the basic principle that the hedged portfolio, being riskless, must have a return equal to the risk-free rate of interest.

All other factors constant, the higher the short-term, risk-free interest rate, the ________ the cost of buying the underlying asset and carrying it to the ________ of the call option.

The ________ is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the ________.

The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, ________.

The option price will change as the price of the . For a , as the price of the underlying asset increases (all other factors constant) , the option price increases. The opposite holds for a .

The is fixed for the life of the option. All other factors equal, the lower the strike price, the the price for a call option. For put options, the the exercise price, the higher the option price.

All other factors equal, the the expected volatility (as measured by ) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it.

on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, on the underlying asset tend to increase the price.

All other factors constant, the higher the short-term, risk-free interest rate, the the cost of buying the underlying asset and carrying it to the of the call option.

The is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the .

The of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, .