AFM274 Chapter Notes - Chapter 14: Call Option, Straddle, Option Style

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lemonbeetle804

13 Aug 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM274

Professor

Tu Nguyen

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Document Summary

Financial option: a financial contract between two parties. Call option: gives the owner the right to buy the asset (shares). Put option: gives the owner the right to sell the asset (shares). Option writer: the person who takes the other side of the option contract (i. e. the person who sold the option). Exercise: the action of the owner of an option to enforce the agreement and buy or sell stocks at the option price. Strike (exercise) price: the price at wh ich the holder buys or sells the share of stock when the option is exercised. American options: the most common kind of option; they allow their holders to exercise the option on any date up to and including a final date. Expiration date: the final date on which an option can be exercised. European options: allow their holders to exercise the option only on the expirati on date. Option premium: the market price of an option.

Related Questions

please need some help with these three questions im stuck on

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.

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.

crimsonyellowjacket775

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?

Problem 5

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

1.Consider the following portfolio: You buy two July 2009 maturity call options on Dell with exercise price of 30. You also sell two July 2009 maturity put options on Dell with an exercise price of 40. The Call premium is $3.30 and the Put premium is $2.50.

Assume each option contract is for one share of stock.

e. What will be your profit/loss on this position if Dell is selling at $42 on the option maturity date?

f. What will be your profit/loss on this position if Dell is selling at $38 on the option maturity date?

g. At what stock price on the option maturity date will you just break even on your investment?

Make sure that you show or explain all calculations. Make sure you answer all questions above.

2- Consider an option on a non-dividend-paying stock when the stock price is $48, the strike price is $45, the risk-free interest rate is 6% per annum, the volatility is 20% per annum, and the time to maturity is five months. It can be shown that d1 = .7576 and d2 = .6285.

Create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts). How many shares would you buy or sell?

Make sure that you show or explain all calculations. Make sure that you state the number of shares. Make sure that you state whether you would buy or sell the shares

AFM274 Chapter Notes - Chapter 14: Call Option, Straddle, Option Style

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