Discuss the following:
QUESTION 1
A European call option written on one share of Ponce de Leon Foods, Inc. has the following parameter values: S = $112, X = $100, r = 8% p.a., = 25% p.a., T = 3 months. Find the value of d1, rounded to 4 decimals (e.g., 0.0712).
QUESTION 2
A European call option written on one share of Crook & Crook, Inc. has the following parameter values: S = $31, X = $37, r = 5% p.a., = 20% p.a., T = 3 months. Find the value of d2, rounded to 4 decimals (e.g., 0.0712).
QUESTION 3
A European call option written on one share of Medident Corp. has the following parameter values: S = $220, X = $200, r = 5% p.a., sigma = 30% p.a., T = 6 months. Find the call option's premium, rounded to 2 decimals (e.g., 3.24). Do NOT include the $ sign in your answer; write only the numerical value.
QUESTION 4
Consider three at-the-money (ATM) European call options (i.e., S = X for each of them) written on the same underlying asset, with the following common parameter values: r = 0% p.a. and = 100% p.a. However, one of the options matures in T = 12 months, another in T = 24 months, and the last one matures in 36 months. Based on the premiums of these three call options, what do you conclude regarding the relationship between the call premium and time to maturity?
The call option premium decreases as time to maturity increases.
There is no relationship between the call option's premium and its time to maturity.
The call option premium remains the same as time to maturity increases.
The call option premium increases as time to maturity increases.
The relationship between the call option's premium and its time to maturity is U-shaped.
QUESTION 5
Consider three at-the-money (ATM) European PUT options (i.e., S = X for each of them) written on the same underlying asset, with the following common parameter values: r = 0% p.a. and = 100% p.a. However, one of the options matures in T = 12 months, another in T = 24 months, and the last one matures in 36 months. Based on the premiums of these three put options, what do you conclude regarding the relationship between the put premium and time to maturity?
The put option premium decreases as time to maturity increases.
There is no relationship between the put option's premium and its time to maturity.
The put option premium remains the same as time to maturity increases.
The relationship between the put option's premium and its time to maturity is U-shaped.
The put option premium increases as time to maturity increases.?
QUESTION 6
You buy a 1-year put option and sell the corresponding call option. Both options are written on 1 share of IBM stock and both have an exercise price of $118. In addition, you also buy 1 share of IBM stock. What is the net payoff you receive from this 3-asset portfolio if at expiration the price of each share of IBM stock is $24?
QUESTION 7
Consider two "corresponding" options, consisting of a call and a put with the exact same parameter values. For this pair, the call premium is $8.4. If the current price of the underlying asset is $66 and the present value of the exercise price is $66, what is the premium of the putoption, P? Write the answer with one decimal; e.g., 3.2. Do NOT use the $ symbol in your answer; just write a numerical value.
QUESTION 8
Consider two "corresponding" options, consisting of a call and a put with the exact same parameter values. For this pair, the current price of the underlying asset is $84, the options have an exercise price of $83 and they expire in 9 months. Additionally, the risk-free rate is 4% p.a. What is the difference between the premium of the put option, P, and the premium of the call option, C; that is, what is the value of P - C? Write the answer with two decimals; e.g., 3.24. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive. NOTE: Use the continuous time version of the Put-Call Parity equation (i.e., do NOT use the book's version).
QUESTION 9
A European PUT option written on one share of Deadwood Lumber Co. stock has the following parameter values: S = $28, X = $30, r = 5% p.a., = 30% p.a., T = 12 months. Find the premium of this option, rounded to 2 decimals (e.g., 1.15; do NOT include a dollar sign in your answer).
QUESTION 10
A put option expires $10 in the money, meaning that the option's payoff is $10. What is the payoff at expiration of the "corresponding" call option; that is, a call option with the exact same parameter values as the put option?
QUESTION 11
You form a long straddle by buying a call with a premium of C = $6, and buying a put with a premium of P = $4. Both options have anexercise price of X = $25, both mature in 11 months, and both have the same underlying asset. Find the profit of this straddle when the price of the underlying asset is S = $94. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive.
QUESTION 12
You form a long straddle by buying a call with a premium of C = $8, and buying a put with a premium of P = $5. Both options have an exercise price of X = $30, both mature in 9 months, and both have the same underlying asset. Find the profit of this straddle when the price of the underlying asset is S = $38. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive.
QUESTION 13
You form a long straddle by buying a call with a premium of C = $6, and buying a put with a premium of P = $6. Both options have an exercise price of X = $49, both mature in 7 months, and both have the same underlying asset. Find the profit of this straddle when the price of the underlying asset is S = $40. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive.
QUESTION 14
You form a long straddle by buying a call with a premium of C = $7, and buying a put with a premium of P = $7. Both options have an exercise price of X = $68, both mature in 6 months, and both have the same underlying asset. Find the profit of this straddle when the price of the underlying asset is S = $19. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive.