ECON 370 Lecture Notes - Lecture 8: Call Option

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21 Jan 2015

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The intrinsic value of an option is the payoff that would be received if the option is exercised immediately. (of course, we assume investors want to avoid losses - exercise only if in the money, so the intrinsic value cannot be less than 0. The intrinsic value is max (0, s-k) for calls and max (0, k-s) for puts. So the price of an american option before expiration and exercise cannot be less than the intrinsic value. The price may be greater than max() because the holder has a right to wait and exercise later, when it could be more optimal if the underlying price moves in the right" direction. This is valuable and is part of the option price. Option time value = premium intrinsic value. The more time to expiration left, the greater is the time value. Suppose you own options with a strike price of k to buy (or sell) n shares:

Related Questions

1. Which of the following cannot be determined using a production possibility table?

What combination of outputs can be produced.
How much less of one output can be produced if more of another output is produced.
What combination of outputs is best.
How much output can be produced from a given level of inputs.

2. Internal government debt is:

debt owed by citizens to their government.
debt owed by one government to another government.
government debt owed to citizens.
government debt owed to foreigners.

3. In general, budget deficits should:

never be run since they slow economic growth over the long run.
never be run since they crowd out investment in the short run.
be run on a temporary basis whenever the economy is below potential output.
be run on a permanent basis since they can always be financed over and over again.

4. If taxes and government outlays were constant and did not vary with income, then:

passive deficits would increase.
passive deficits would not exist.
structural deficits would increase.
structural deficits would not exist.

5. If the debt of the federal government increases by $10 billion in one year, then the budget:

deficit in that year must be $10 billion.
surplus in that year must be $10 billion.
deficit in that year decreased by $10 billion.
surplus in that year increased by $10 billion.

6. Which of the following would make the impending Social Security problem worse?

Raising income taxes when the baby boomers begin to retire.
Reducing the age at which one is eligible to receive payments.
Reducing Social Security retirement benefits.
Introducing means testing.

7. The price mechanism is: (Points : 5)

not affected by social and political forces.
affected by social but not political forces.
affected by political but not social forces.
affected by both political and social forces.

8. Social forces:

affect the price mechanism through cultural norms.
affect the price mechanism, but not the legal system.
affect the price mechanism through scarcity.
do not affect the price mechanism.

9. Opportunity cost is the same as marginal cost.

True
False

10. Which of the following is a characteristic of a market economy?

Private property.
Government ownership of the means of production.
Distribution according to need.
Tradition determines the what, how, and for whom decisions.

11. Mexico has a comparative advantage in producing corn:

if its opportunity cost of producing corn is higher than the opportunity cost in other countries.
if its opportunity cost of producing corn is the same as the opportunity cost in other countries.
if its opportunity cost of producing corn is lower than the opportunity cost in other countries.
regardless of the opportunity cost in other countries.

12. The opportunity cost for a student of attending college for a year is best measured by the:

benefit received by the student.
tuition paid for the year.
value of the next-best activity forgone by attending college.
total money outlays associated with attending college.

13. A passive deficit is the portion of the deficit that exists when:

the economy is at potential income.
the economy is beneath potential income.
inflation is not fully anticipated.
inflation is fully anticipated.

14. An important international lending institution is the:

IMF.
The Group of Eight.
EU.
WTO.

15. Private property rights:

are essential elements of a market economies.
do not need to be enforced in market economies.
must be established before a socialist economy can function properly.
ensure an equitable distribution of income in market economies.

16. If a country has a comparative advantage in the production of a good, then its resources are better suited to the production of that good than the resources of other countries.

True
False

17. As the interest rate rises, debt service:

decreases.
does not change, but debt increases.
increases.
does not change and neither does the debt.

18. Your opportunity cost of taking this course is:

the tuition you paid for the course.
the benefit of the activity you would have chosen if you had not taken the course.
the benefit you get from taking this course.
the cost of the activity you would have chosen if you had not taken the course.

19. One advantage of a corporation over a sole proprietorship is:

greater accountability.
avoidance of double taxation.
ease of formation.
greater ability to obtain funds.

20. Maintaining objectivity is easiest in:

positive economics.
the art of economics.
normative economics.
it is just as easy in all of the above

byzantiumimpala567

""Please give answer with simple explaination""""Please give answer with simple explaination""""Please give answer with simple explaination""

1. In every society, choices must be made because resources are

a. Infinite, but economic want are finite

b. Finite, but economic wants are insatiable

c. Unlimited, but economic wants limited

d. Limited, and so are economic wants

2. Which question is an illustration of a microeconomic question

a. Is the quantity of wine purchased in one year dependent upon the price of wine?

b. Does government spending influence the total level of employment in the economy?

c. Is the purchasing power of the dollar higher or lower today than it was in 2000?

d. Is capitalism superior to socialism?

3. The purpose of the ceteris paribus assumption used in economic analysis is to :

a. Avoid making normative statements

b. A void the post hoc, ergo propter hoc fallacy

c. Make sure that all relevant factors are considered

d. Restrict the analysis to effect of a single economic factor

4. The profit motive is

a. Ineffective at producing consumer goods

b. Inherently beneficial to society if left alone to pursue its own self interests

c. Effective at producing goods when consumption is non-rival or non-excludable

d. Is often at odds with societies interests

5. In the system of central planning

a. There is repaid of the infrastructure

b. There is severe inflation in wholesale and retail prices

c. Economic growth leads to widespread unemployment among workers

d. The outputs of some industries become inputs for other industries

6. The market system communicates changes in supply and demand and elicits appropriate responses from businesses and resource suppliers. This is known as the:

a. Rationing function of prices

b. Guiding function of prices

c. Monetary function of prices

d. Circular flow of income

7. An increase in the quantity of automobiles supplied would be caused by which be caused by which of the following?

a. An increase in the demand for automobiles

b. A decrease in the demand for automobiles

c. Higher prices for steel

d. Higher prices for gasoline

8. All of the following would cause an increase in the demand for private airplanes at a given price, except a:

a. Decrease in interest rates

b. Increase in consumer incomes

c. Decrease in taxes on luxury goods

d. Decrease in the costs of constructing private airplanes

9. In modern economies of mass production,

a. Biological need motivates most consumption

b. The intrinsic value of goods and services motivates mass consumption

c. Affluence makes relative depravation meaningless

d. Invidious comparison motivates much of mass consumption

10. a more equal distribution of income in the United States would result in greater total consumer satisfaction. This statement is based on the concept that:

a. Income inequality is unfair

b. Income inequality is undemocratic

c. Income equality stimulates efficiency

d. Incomes are subject to diminishing marginal utility

11. While command systems suffer from incentive problems, market economies

a. Have no incentive problems

b. Suffer from incentive problems of their own

c. Tend to resolve all problems by their own dynamics

d. Have problems to the degree that there is government interference.

12. What economic concepts can be used to explain the reason that a new car purchased by a consumer and driven off a new car lot decrease in value almost immediately compared with the value of the same make and model of a car still on the new car lot?

a. Positive and negative externalities

b. Liability rules and lawsuits

c. The Coase theorem and moral hazard

d. Asymmetric information and adverse selection

13. Consider a situation where the U.S. Congress wants to place a special tax on private airplanes to increase tax revenue. This tax would only be effective in raising new tax revenues if the price elasticity of:

a. Supply is elastic

b. Supply is inelastic

c. Demand is elastic

d. Demand is inelastic

14. Under what circumstances would you expect economic profits to be zero in a particular industry?

a. During a recession

b. When there is little competition in the industry

c. When the industry is neither expanding nor contracting

d. When the demand for the product being produced is increasing

16. If economic resources are perfectly interchangeable between the two products shown on a production possibilities graph:

a. The economy will always be at full employment

b. More of one product can be produced without producing less fo the other product

c. The production possibilities curve would be straight line

d. The two products are of equal value to the economy

17. Opportunity cost is best defined as:

a. Marginal cost minis marginal benefit

b. The time spent on an economic activity

c. The value of the best foregone alternative

d. The money cost of an economic decision

18. All of the following would affect the position of a country production possibilities curve expect:

a. The quality of labor

b. The level of employment

c. The amount of the capital stock

d. Technological progress

19. The post hoc, ergo propter hoc fallacy consists of:

a. Using an example to a different point

b. Inferring causality from chronological sequence

c. Jumping to conclusions from an inadequate number of cases

d. Arguing for or against the person rather than the position being supported

20. Which is one of the five fundamental question that needs to be answered by economic system

a. What is the rate of unemployment?

b. Who will be the richest person in the economy?

c. What goods and services will be produced?

d. Why are the prices for goods and services so high?

21. The institution of private property is sustained over time by:

a. Competition

b. Bequests

c. Self-interest

d. Free enterprise

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ECON 370 Lecture Notes - Lecture 8: Call Option

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