Question 1

Which of the following is correct ?

Accepted Answer

H = (Su - Sd)/ (Su - X)= (80 - 55)/ (80 - 60)= 25/20 = 1.25

Question 2

Use the following statements to answer the question:

Accepted Answer

Statement I is correct, as VIX is indeed a measure of volatility in the financial markets. However, statement II is incorrect, as VIX is actually calculated as the expected volatility of the S&P 500 Index over the next 30 days, based on the prices of S&P 500 options.

Question 3

_________is an estimate of the ________ of the underlying asset based on observed option prices.

Accepted Answer

The answer of _________is an estimate of the ________ of...

Question 4

VIX can be used

Accepted Answer

VIX is commonly known as the "Fear Gauge" and is used to measure the expected volatility of the S&P 500 index over the next 30 days. It is calculated from the prices of S&P 500 index options and can be used to estimate the level of fear or stress in the market. VIX is not used to price interest rate volatility or estimate the risk of default premium of the underlying debt.

Question 5

Create a table illustrating the range of payoffs of a protective put strategy for the following values of the underlying asset: 60,70,80,90,100.The strike price of all options in the strategy is $80 and the current value of the underlying asset is $80.

Accepted Answer

The answer of Create a table illustrating the range of...

Question 6

Suppose Jo's stock price is currently $100.In the next three months it will either fall to $70 or rise to $120.What is the option delta of a call option with an exercise price of $100?

Accepted Answer

Su (pu)+ Sd (pd)= 25 (0.6)+ 10 (0.4)= 19

Question 7

Toronto Skaters' stock is now worth $100.In one month it can either be $80 or $120.Given that the monthly risk-free rate is 2%,how many calls does the investor need to sell to hedge a long position in ABC stock? What is the corresponding value of the call? (assume strike price = $100)

Accepted Answer

2,$10.78 h = (Pu - Pd)/(Pu - X)= 2,C = 1/h [S - (Pd/1+r)]

Question 8

Francis is long the underlying and has sold h number of call options with the following binomial tree:
  
Given the current asset price is $20 and r is 5%,what is the price of the above call option?

Accepted Answer

H = (25-15)/ (25 - 20)= 2,C = 1/h [S - (Sd/(1+r)] = 2.86

Question 9

(Assume: continuous compounding and value of the underlying asset is $22)
Marie wants to determine the fair value of a put option with strike price $20 due to expire in 2 years.A call with the same strike price and expiration is worth $5.The risk-free rate is 4%.What would you tell Marie is the fair value of the put option?

Accepted Answer

The answer of (Assume: continuous compounding and value of the...

Question 10

Create a table depicting the payoffs for a collar given Xput = $50,S = $55,and Xcall = $60.Assume the value of the asset in 2 months will be: $40,$50,$55,$60,$75,$80.

Accepted Answer

The answer of Create a table depicting the payoffs for...

Question 11

Briefly explain how to replicate the payoff of a risk-free asset using put-call parity.

Accepted Answer

The answer of Briefly explain how to replicate the payoff...

Question 12

The current stock price is $568.36,a one-year call option with strike price of $500 is $102,and the risk-free rate is 2%.What should be the price of a one-year put option with the same strike price?

Accepted Answer

The answer of The current stock price is $568.36,a one-year...

Question 13

Which of the following best defines implied volatility?

Accepted Answer

Implied volatility is an estimate of the price volatility of the underlying asset based on observed option prices. It reflects the level of uncertainty or risk perceived by market participants and is calculated using an option pricing model. This model takes into account various factors such as the current price, strike price, time to expiration, interest rates, and dividends. Implied volatility is a key parameter in determining an option's price and plays a crucial role in options trading and risk management.

Question 14

Higher _________,higher ________

Accepted Answer

In options trading, higher implied volatility leads to higher option prices. The other choices do not have a direct relationship between the two variables.

Question 15

Which of the "Greeks" measures the change in option value with a change in volatility of the underlying asset?

Accepted Answer

Vega measures the sensitivity of the option value to changes in volatility. Delta measures the change in option value in response to a change in the price of the underlying asset, Theta measures the time decay of an option, and Gamma measures the rate of change of the option's delta in response to changes in the price of the underlying asset.

Question 16

Assume the current value of the underlying asset is $20 and the value of the underlying asset tomorrow can either be $15 or $25.What is the risk-neutral probability of generating a 2% return on the asset?

Accepted Answer

20(1.02)= 25 (P)+ 15 (1-P)

Quiz 12: Options