AFM274 Chapter Notes - Chapter 14: Put Option, Call Option, Open Interest

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OC2146671

25 Jul 2019

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM274

Professor

James Thompson

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Document Summary

Financial option: a financial contract between two parties. Option basics: call option: gives the owner the right to buy the asset, put option: gives the owner the right to sell the asset, option writer: the person who takes the other side of the contract. Option contracts: exercising: holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price. Short position"s loss is the difference between the market price of the stock and the price that is sold with the contract. If s is the stock price at expiration, k is the exercise price, and c is the value of the call option, p is the value of the put option. Investors only exercise if the payoff is positive: call value at expiration, c = max (s - k,0, put value at expiration, p = max(k - s,0) Short position in an option contract: has an obligation to the investor who is long.

Related Questions

please need some help with these three questions im stuck on

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.

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.

crimsonyellowjacket775

1. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option price is $7.75

a. Is this option an at-the-money option, out-of-the-money option, or in-the-money option?

b. Compute the intrinsic value and the time value of this option.

2. You write a put option with X = $50 and buy a put with X = $60. One is selling for $3 and another is selling for $8. The options are on the same stock and have the same maturity date.

a. What is the break-even point for this strategy?

b. How much is profit/loss when stock price is $55?

3. George Evans is currently bullish on the common stock of the Franklin Corporation. Franklinâs current price is $75 and a 3-month call with an exercise price of $75 is selling for $4. Ignore commissions and taxes. If Evans purchases the call and the price of the stock increases to $81 after 3 months, what kind of rate of return will he make?

4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $113 per share. What will be your realized profit/loss on the investment?

mauveguinea-pig338

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?

Problem 5

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

AFM274 Chapter Notes - Chapter 14: Put Option, Call Option, Open Interest

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