FNCE 3P93 Chapter Notes - Chapter 25: Call Option, Option Style, Corporate Security

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23 Nov 2017

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An option is a contract that gives the owner the right to buy or sell some asset at a fixed price on or. 25. 1: options: the basics before a given date. Options are a unique type of financial contract because they give the buyer the right, but not the obligation, to do something. The buyer may use the option if it is profitable, if not it can be thrown away. There are two types of options: call options and put options: call options give the owner the right to buy an asset at a fixed price during a particular ti(cid:373)e pe(cid:396)iod. You can force the seller to buy (cid:271)a(cid:272)k the asset f(cid:396)o(cid:373) (cid:455)ou fo(cid:396) a fi(cid:454)ed p(cid:396)i(cid:272)e the(cid:396)e(cid:271)(cid:455) (cid:862)put it to hi(cid:373)(cid:863) For call options: the seller sells the call options and receives money up front, and then the seller has the obligation to sell the asset at the exercise price if the option holder wants it.

Related Questions

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.

4. If you __________, then you may be forced to buy the underlying stock.

Buy a Call Option
Buy a Put Option
Sell a Call Option
Sell a Put Option

5. Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices.

Higher, Higher
Higher, Lower
Lower, Lower
Lower,Higher

6. Which Statement is correct?

Speculators make money by setting up transactions and are the go betweens in the derivatives market.
A firm should always hedge in order to reduce risk whenever they can
Hedgers do not mind losing money as long as they are reducing their risk
Brokers try to find mispricings in the market where they can buy at a low price and simultaneously sell at a high price without taking on any risk.

7. Which statement regarding executive stock options is correct?

They are short term and usually expire after one year.
They should reduce agency costs by making managers act like shareholders
They are included as compensation expense on the income statement.
Managers can sell the options on an exchange

8. Which of the following statements are correct?

Forward contracts are standardized and trade on an exchange
Profits and Losses on Futures contracts are marked to market on a daily basis.
Delivery of the assets almost never occurs in the forward market
Futures contracts allow you to buy or sell individual stocks for a preset price on the expiration date.

9. You need a barrel of oil next month. You could either buy the oil today and keep it for a month, wait and buy the oil next month when you need it, you could enter into a futures contract to buy oil at the current futures price $81, or you can pay $2 for a call option that gives you the right to buy oil for $80. The current spot price is $79 and the risk free rate is 2%, and carrying costs are $2. If the price ends up being $84 next month, then you should have ______________.

Waited to buy the oil
Entered into a futures contract
Bought a call option
Buy the oil today and store it for a month.

10. Which of these should cause the dollar to appreciate?

A decline in foreign demand for US goods and services
An increase in US demand for foreign goods and services
An increase in foreign demand for US financial assets
An increase in the amount of gold held by the US central bank

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FNCE 3P93 Chapter Notes - Chapter 25: Call Option, Option Style, Corporate Security

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