AFM391 Chapter Notes - Chapter 14: Underlying, Financial Instrument, Call Option

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lemonbeetle804

16 Dec 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM391

Professor

Sasan Saiy

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Document Summary

Derivative: a financial instrument that is derived from some other underlying quantity. Underlying quantity: the value of an asset, an index value, or an event that helps determine the value of a derivative. Option: a derivative contract that gives the holder the right, but not the obligation, to buy or sell an underlying financial instrument at a specified price. Call option: an option that gives the owner a right to buy. Put option: an option that gives the owner the right to sell. Out-of-the-money: when the value of the underlying instrument in an option contract is unfavourable to the holder executing the option compared with letting the option expire. In-the-money: when the value of the underlying instrument in an option contract is favourable to the holder executing the option compared with letting the option expire. Intrinsic value of an option: the difference between the market price of the underlying security and the strike price.

Related Questions

Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

erinbutterfly833

I. Fill in the blank using a number of terms listed below (@1 point). Annuity due, Asset Mgmt ratio, Call, Comparisons, Comparative ratio analysis, Corporation, Covered, Current Ratio, DSO, Du Pont Equation , Equal, Future performance, Greater, Higher, In-the-money, Less, Liquidity, Lower, Option, Ordinary Annuity, Out-of-the-money, Percentage, Perpetuity, Put, PV, Quick, Reduced, TIE, TATO, Trend Analysis, Writer 11. The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n) _______________. 12. When a loan is amortized over a five year term, the amount of interest paid is ________________ each year. 13. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases? It will be worth _________________. 14. The more frequent the compounding the _________________ the effective interest rate. 15. More frequent compounding results in _______________ future values and _______________ present values than less frequent compounding at the same nominal interest rate. 16. A(n) _______________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever). 17. A(n) _________________ is a contract which gives its holder the right to buy(or sell) an asset at some predetermined price within a specified period of time. 18. The seller of an option is called the option __________________. 19. An investor who writes call options against stock held in his or her portfolio is said to be selling _______________ options. 20. When the exercise price exceeds the current stock price, a call option is said to be _____________________; however, when the exercise price is less than the current price of the underlying stock, a call option is _________________. 21. An option which gives you the right to sell a stock at a specified price within some future period is called a(n) ______________ option.

1. Professional gamblers know that the odds are always in favor of the house (casinos). The fact that they gamble says they are

A. irrational.

B. risk-neutral.

C. risk-averse.

D. risk seekers.

2. The clearing corporation's main role in the futures market is to:

A. set the market price of the contract.

B. act as the counterparty to both sides of the transaction, thereby guaranteeing payment.

C. provide the underlying assets so the contracts can be created.

D. all of the above.

3. Marking to market is a process that:

A. involves a transfer of risk.

B. ensures that the buyers and sellers receive what the contract promises.

C. always requires the sellers of contracts to transfer funds to the buyers of contracts.

D. buyers and sellers can request for an additional fee when the contract is created.

4. Considering a put option, an increase in the strike price:

A. causes the intrinsic value of the option to decrease if it is above zero.

B. causes the intrinsic value of the option to increase if it is above zero.

C. causes the value of the option to decrease.

D. makes the option worthless.

5. The intrinsic value of a call option:

A. is the difference between the option price and the interest rate.

B. must be less than or equal to zero.

C. is the greater of zero or the difference between the price of the underlying asset and the strike price.

D. will be negative if the time value of the option is negative.

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AFM391 Chapter Notes - Chapter 14: Underlying, Financial Instrument, Call Option

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