FIN 300 Lecture Notes - Lecture 24: Net Income, Operating Cash Flow, Normal Distribution

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bronzemule144

7 Oct 2016

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Lo1 the basics of call and put options and how to calculate their payoffs and profits. Lo2 the factors that affect option values and how to price call and put options using no arbitrage conditions. Lo3 the basics of employee stock options and their benefits and disadvantages. Lo4 how to value a firm"s equity as an option on the firm"s assets and use of option valuation to evaluate capital budgeting projects. Lo5 the basics of convertible bonds and warrants and how to value them. Answers to concepts review and critical thinking questions. 2. (lo1) a call option confers the right, without the obligation, to buy an asset at a given price on or before a given date. A put option confers the right, without the obligation, to sell an asset at a given price on or before a given date. You would buy a call option if you expect the price of the asset to increase.

Related Questions

a. What is the difference between the two primary kinds of options (puts and calls)? What is the difference between European and American options?

b. What is the difference between payoff and profit of an option? Which line (payoff, profit) should be lower when you draw the two lines on graph for a long call option?

c. How do you form a protective put? What is your maximum profit when you sell a straddle?

d. Given a 3-month put price is 4.5 at strike price of 57.5 on an asset that is currently trading at 55.17. Assume risk free rate to be 7%. What is the price of a call option with strike price of 57.5 with 3 month maturity on the same asset? Show how you got the value. (Hint: You can use Put-Call parity to solve this)

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

1. What happens to the value of a call option if the time to expiration is increased?
2. All option pricing models are based on the concept of a riskless hedge. Describe what this means. 3. What is the difference between an exercise price and an exercise value?
4. When the exercise price exceeds the current stock price a put option is said to be _________.
5. Options sold without the stock to back them up are called__________ options.
6. If you exercise one call option contract, how many shares of stock will you get?

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FIN 300 Lecture Notes - Lecture 24: Net Income, Operating Cash Flow, Normal Distribution

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