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9 Jan 2018

True or False? Give reasoning.

1. When riskless interest rate is 0% then the Put option costs exactly as much as the Call Option, when the strike is 'at the money' (i.e., K=So)'

2. For any given European option, the chance that one makes money in the end is 50-50.

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11 Jan 2018

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Related questions

Are each of these true or false and why?

1. If you are sure that an American option will be in-the-money before expiration, you should always purchase that option.

2. Suppose we have a stock that will not pay out any dividends in the future and the current risk free interest rate is greater than 0. An at-the-money European call option on the given stock must cost more than an at-the-money European put option on that stock with the same expiration. [Hint: Use the Put-Call Parity condition along with what it means for the option to be “at-the-money”.]

McDonald Super is an arbitrageur who looks for arbitrage opportunities in the stock options market. Option-102 is a European put option with a strike price of $50 while its underlying stock (non-dividend paying) has a current price of $37. Option-103 is a European call option with a strike price $18 while the underlying stock (non-dividend paying) has a current price of $20. The market interest rate is fixed at 10% per annum (Time period is 2 years). Based on this situation, please explain whether Mr. Super can make arbitrage gain with both options and how that can be done (given that the price of Option-102 costs $3 while that of Option-103B costs $5).

Looking at the following options table:

British Pound Option Prices (U.S. CENTS per Pound, 62,500 pounds per contract)
US cents/£ Call Call Call Put Put Put
Spot Rate Strike Price May June July May June July
144.8 144 0.88 1.42 1.44 0.52 1.06 -----
144.8 145 0.42 1.02 ----- ----- ----- -----
144.8

146

 0.2 0.68 0.72 1.75 2.32 -----
QUESTION A: Give me one example of an option that is out of the money? Be specific as far as month and strike price. Explain your answer?
QUESTION B: Give me one example of an option that is in the money? Be specific as far as month and strike price. Explain your answer?
QUESTION C: Which, if any, option is at the money? Explain your answer.
QUESTION D: Looking at the July 144 CALL option, break down the option's premium into its Intrinsic Value and Time Premium components
Show your calculations.
QUESTION E: Looking at the June 146 PUT option, break down the options premium into its Intrinsic Value and Time Premium components
Show your calculations.
QUESTION F : If you purchase two (2) June 145.0 call options what will be the total amount of your premium that you need to pay?
QUESTION G: Referring to QUESTION F, when do you pay the option premium, on the settlement date or on the date that you purchase the options?
QUESTION H: Today you purchase three (3) June 144.0 Puts. On settlement date the spot rate = 142.5 cents per pound, what is your net profit/loss?
Show your calculations.
QUESTION H: Today you purchase two (2) June 144.0 Calls. On settlement date the spot rate = 143.5 cents per pound, what is your net profit/loss?

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