Which of the following statements is true?
A)In general, the relationship between the value of an option and the underlying value of a security is non-linear.
B)For an out-of-the money call option the price of the underlying security is less than the option's exercise price.
C)Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option payoffs, some analysts consider an option's gamma too.
D)All of the listed options are correct.

Question

Quizplus · Accepted Answer

A) This statement is true. The relationship between the value of an option and the underlying value of a security is nonlinear due to factors such as time decay and volatility.
B) This statement is also true. An out-of-the-money call option has no intrinsic value because exercising the option would result in a loss, so its price is solely based on the expectation that the underlying security's price will increase above the exercise price before expiration.
C) This statement is true as well. The delta method is a simplified approach that assumes option prices move linearly with changes in the underlying security's price, but this is not always the case. To account for the non-linearity of option payoffs, some analysts use the gamma, which measures the rate of change of the delta with respect to the underlying security's price.
Therefore, all of the listed options are correct.

Which of the Following Statements Is True