Exam 18: Option Valuation and Strategies

The VIX is

If an investor sells a stock short, that individual reduces the risk of loss by

Put-call parity basically says that combination of a put, a call, and a risk-free bond must be the same value as the underlying stock. If not, at least one market is in disequilibrium. The resulting arbitrage alters the securities' prices until the value of the call plus the bond is equal to the prices of the put plus the stock. Currently, the price of a stock is $100 while the price of a call option at $100 is $10; the price of the put option is $4.59, and the rate of interest is 8 percent, so that the investor may purchase a $100 discounted note for $92.59. ​ a. Do these prices indicate that the financial markets are in equilibrium? Show all calculations. ​ b. An arbitrage opportunity exists, but if the position is set up incorrectly, losses will be sustained. Verify that a loss will be sustained if the arbitrage is set up incorrectly. Calculate the results based on stock prices of $80, $100, and $120 as of the expiration date of the options.

Selling a call and purchasing a treasury bill produces the same returns as buying a stock.

According to the Black/Scholes option valuation model, the value of a call option increases if

If the hedge ratio is 0.7, the number of call options necessary to offset a long position in a stock is 7.0.

The Black/Scholes option valuation model divides the option's strike price by the probability that the option will be exercised.

Put-call parity explains why a change in interest rates by the Federal Reserve affects stock and option prices.

If a call is overvalued, put-call parity suggests that the investor should

The price of a stock is $46 and the prices of call options to buy the stock at $45 and $50 are $6 and $3, respectively. What are the potential profits and losses when the price of the stock is $40, $45, $50, and $55 if the investor buys the call at $45 and sells the call at $50?

The "collar strategy" is used to lock-in profits from an increase in the price of a stock.

A call option exists to buy a stock at $25 a share. According to the Black/Scholes option valuation model, what is the value of the call a. if the price of the stock is $25, the interest rate is 8 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)? b. if the price of the stock is $25, the interest rate is 6 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)? c. if the price of the stock is $27, the interest rate is 8 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)?

According to the Black/Scholes option valuation model, the value of a call option rises as interest rates increase.

To construct a bear spread, the investor buys a call option and shorts the stock.

An investor owns 1,000 shares of stock but anticipates its price may decline. To reduce the risk of loss, how many call options must be sold if the hedge ratio is 0.7?

If the investor anticipates that the price of stock will be stable, he or she may

If an individual sells a stock short, that investor is protected from a large increase in the price of the stock by selling a call option.

According to put-call parity, if a stock is overpriced, the investor should sell the stock short, sell the put, buy the call, and buy the bond.

According to the Black/Scholes option valuation model, a call option's value decreases if

The hedge ratio determines