Exam 25: Options

Apply the Black-Scholes formula to the pricing of a 6-month call option with an exercise price of $98 on a stock with a current price of $98.The standard deviation of the annual stock return is 32%.The 6-month interest rate is 2.5%.

Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65.Also assume that the price of the middle call were the average of the other two calls.Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero.What can you deduce from this example about option pricing? Let X denote the exercise price:

Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10% nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70.Show that it is possible to replicate the stock payoff by borrowing and buying a call option.

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration, then the option:

Which is the best definition of a call option?

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

On March 30 you are holding a call option on a stock (exercise price of $60), which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

Canadian Pacific shares are currently selling at $75.The premium on a call option on Canadian Pacific shares with an exercise price of $60 will be:

Stocks that have more volatile price changes have more valuable call options because call holders:

It has been determined that 0.5 shares of stock should be purchased with borrowed funds to replicate the payoff to one call option.What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

Which graph represents a selling a call option?

Which combination of positions will tend to protect the owner from downside risk?

What is a callable bond and how is its value determined?

The longer the time until expiration of a call option, the greater the value of the option.

Option buyers can have a(n) __________ of exercising their options.Options sellers can have a(n) __________ of exercising their options.

The option to abandon a project investing in real assets can be considered to have a strike price equal to the:

If you feel strongly that a stock price will move, but are unsure of the direction, you could buy the stock and:

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share, then:

The conversion ratio for a convertible bond equals the: