FINS1612 Chapter Notes - Chapter 11: Call Option, Option Style, Financial Instrument

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tealwombat375

5 Nov 2020

School

UNSW, UNSW Sydney

Department

Finance

Course

FINS1612

Professor

Apro J Zein, Mr AB Balogh, Mr W Fan

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Document Summary

Options differ from futures as they provide an asymmetric cover against price movements (futures have symmetric payoffs). they limit effects of adverse price movements without reducing profit from favourable moves . An option gives the buyer the right, but not the obligation to buy or sell a specified commodity or financial instrument at a predetermined price (strike price), on or before an expiration date . Call options - gives the option buyer the right to buy the commodity/instrument at the exercise price. Exercise if the market price > strike price. Put options - gives the option buyer the right to sell the commodity/instrument at the exercise price. Exercise if the market price < strike price. The buyer of the right takes a "long position" giving him/her the right to buy (call option) or sell (put option). The seller of the right takes a "short position".

Related Questions

Hi, I hope someone could answer this one for me. I am lost, since my instructor just went over concepts in class and no computational stuff whatsoever.

********** BEGINNING PROBLEM **** There are four possible states of the world tomorrow. Assume all states are equally likely. The price of three different stocks in each of the states are given by the table. Recall that options give you the right not the obligation to buy or sell at the exercise price.

State of the World 1 2 3 4

Stock Price 1 $1 $3 $9 $8

Stock Price 2 $10 $2 $5 $1

Stock Price 3 $6 $5 $2 $9

A. Find what a call option on stock 1 with a strike price of $6 pays the investor in each of the four states.

B. Find what a put option on stock 2 with a strike price of $4 pays the investor in each of the four states.

C. A risk neutral investor wants to buy on option on stock 3. Should they buy a call option with strike price of $4 or a put option with a strike price of $7?

****************** END ******************

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

I. Fill in the blank using a number of terms listed below (@1 point). Annuity due, Asset Mgmt ratio, Call, Comparisons, Comparative ratio analysis, Corporation, Covered, Current Ratio, DSO, Du Pont Equation , Equal, Future performance, Greater, Higher, In-the-money, Less, Liquidity, Lower, Option, Ordinary Annuity, Out-of-the-money, Percentage, Perpetuity, Put, PV, Quick, Reduced, TIE, TATO, Trend Analysis, Writer 11. The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n) _______________. 12. When a loan is amortized over a five year term, the amount of interest paid is ________________ each year. 13. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases? It will be worth _________________. 14. The more frequent the compounding the _________________ the effective interest rate. 15. More frequent compounding results in _______________ future values and _______________ present values than less frequent compounding at the same nominal interest rate. 16. A(n) _______________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever). 17. A(n) _________________ is a contract which gives its holder the right to buy(or sell) an asset at some predetermined price within a specified period of time. 18. The seller of an option is called the option __________________. 19. An investor who writes call options against stock held in his or her portfolio is said to be selling _______________ options. 20. When the exercise price exceeds the current stock price, a call option is said to be _____________________; however, when the exercise price is less than the current price of the underlying stock, a call option is _________________. 21. An option which gives you the right to sell a stock at a specified price within some future period is called a(n) ______________ option.

FINS1612 Chapter Notes - Chapter 11: Call Option, Option Style, Financial Instrument

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