Exam 16: Option Valuation

You are considering purchasing a put option on a stock with a current price of $33.The exercise price is $35,and the price of the corresponding call option is $2.25.According to the put-call parity theorem,if the risk-free rate of interest is 4%,and there are 90 days until expiration,the value of the put should be ____________.

The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called _________.

A call option with several months until expiration has a strike price of $55 when the stock price is $50.The option has _____ intrinsic value and _____ time value.

Investor A bought a call option and Investor B bought a put option.All else equal if the underlying stock price volatility increases the value of Investor A's position will ______ and the value of Investor B's position will _______.

You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. -Suppose the desired put options with X = 50 were traded.What would be the hedge ratio for the option?

You are considering purchasing a call option with a strike price of $35.The price of the underlying stock is currently $27.Without any further information,you would expect the hedge ratio for this option to be _______________.

The stock price of Harper Corp.is $33 today.The risk-free rate of return is 6% and Harper Corp.pays no dividends.A put option on Harper Corp.stock with an exercise price of $30 and an expiration date 73 days from now is worth $0.95 today.A call option on Harper Corp.stock with an exercise price of $30 and the same expiration date should be worth __________ today.

A call option on Juniper Corp.stock with an exercise price of $75 and an expiration date one year from now is worth $3.00 today.A put option on Juniper Corp.stock with an exercise price of $75 and an expiration date one year from now is worth $2.50 today.The risk-free rate of return is 8% and Juniper Corp.pays no dividends.The stock should be worth __________ today.

You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. -Suppose the desired put options with X = 50 were traded.How much would it cost to purchase?

The stock price of Atlantis Corp.is $43 today.The risk-free rate of return is 10% and Atlantis Corp.pays no dividends.A call option on Atlantis Corp.stock with an exercise price of $40 and an expiration date six months from now is worth $5.00 today.A put option on Atlantis Corp.stock with an exercise price of $40 and an expiration date six months from now should be worth __________ today.

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium,that standard deviation would be called the _______.

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends but the actual call price is $3.75.The most likely explanation for the discrepancy is that either the option is _________ or the volatility you input into the model is too _________.

The delta of a put option on a stock is always __________.

The intrinsic value of an out of the money call option ___________.

Investor A bought a call option that expires in 6 months.Investor B wrote a put option with a 9 month maturity.All else equal as the time to expiration approaches the value of Investor A's position will _______ and the value of Investor B's position will _______.

What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. -Using the Black-Scholes OPM,the put option should be worth __________ today.

If you know that a call option will be profitably exercised then the Black-Scholes model price will simplify to _______.

What would have been the cost of a protective put portfolio?