Which of the following is TRUE? An American call option on a stock should never be exercised early An American call option on a stock should be exercised early when dividends are expected It can sometimes be optimal to exercise early an American call option on a stock even when no dividends are expected and there is no liquidity or portfolio rebalancing need. An American call option on a stock should never be exercised early when no dividends are expected

Which of the following is TRUE? An American call option on a stock should never be exercised early An American call option on a stock should be exercised early when dividends are expected It can sometimes be optimal to exercise early an American call option on a stock even when no dividends are expected and there is no liquidity or portfolio rebalancing need. An American call option on a stock should never be exercised early when no dividends are expected

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 7QTD

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Which of the following is true, select the most appropriate answer below? There is always some chance that an American call option on a stock will be exercised early when no dividends are expected An American call option on a stock should never be exercised early An American call option on a stock should never be exercised early when no dividends are expected There is always some chance that an American call option on a stock will be exercised early
Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock.
If underlying is non-dividend paying, then the time value of an American call option is positive, hence American call should never be exercised early. True False
Tick all those statements on options that are correct (and don't tick those statements that are incorrect). O a. In general the equation S(T) + (K – S(T)) = (S(T) – K) + K is valid. O b. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. An American put option should never be exercised before the expiry time. d. If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke T where T is the expiry time. -T c. O e. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion.
Part I. Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock. Part II. Indicate whether each of the following two statements below is true, false or uncertain and justify your response. It is theoretically impossible for an out-of-money European call and an in-the-money European put to be trading at the same price. Both options are written on the same non-dividend paying stock. A 3-month European put option on a non-dividend-paying stock is currently selling for $3.80. The stock price is $48.0, the strike price is $51, and the risk-free interest rate is 6% per annum (continuous compounding). There is no arbitrage opportunity in this scenario.
Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuingthe stock because it can be diversified away; therefore, it is also irrelevant for valuing a call optionon the stock. Explain
Tick all those statements on options that are correct (and don't tick those statements that are incorrect). a. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion. b. In general the equation S(T) + (K − S(T))† = (S(T) – K)+ + K is valid. An American put option should never be exercised before the expiry time. C. d. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. e. If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke¯T where T is the expiry time.
In equilibrium, stock prices are stable and there is no general tendency for people to buy versus to sell and also hold the following conditions: O a. The current market stock price equals its intrinsic value and expected returns must equal required returns. O b. The current market stock price doesn't equal its intrinsic value and expected returns must not equal required returns O c. Expected returns must equal required returns, but current market stock price doesn't equals its intrinsic value. O d. The current market stock price equals its intrinsic value, but expected returns must not equal required returns.
*which of the following statements is true? Select one: O Investors sell a stock when required return is less than expected return and buy a stock when required return above expected return O Investors sell a stock when it is under-valued and buy it when it is over-valued. O Investors buy a stock when it is under-valued and sell it when it is over-valued None of the answers are correct
My question is for a synthetic call option why do we need to borrow the present value of the strike price and what does it mean in a simple language explanation. Similarly why do we need to lend the present value of the stock at risk-free rate and what does it mean in simple language explanation? Please also clarify the significance of risk free rate? Why is it used in put call parity. Synthetic Call Option: If an investor believes that a call option is over-priced, then he/she can sell the call on the market and replicate a synthetic call. Borrow the present value of the strike price at the risk free rate and purchase the underlying stock and a put. Synthetic Put Option: Similar to the synthetic call option. A synthetic put can be created by re-arranging the put-call parity relationship, if the trader believes the put is overvalued. Synthetic Stock: A synthetic stock can also be created by rearranging the put-call parity identity. In this case, the investor will buy the…
Explain why the risk premium of a stock does not depend on its diversifiable risk. Question content area bottom Part 1 (Select the best choice below.) A. Investors don't care about diversifiable risk and so don't hold any. B. Investors care about diversifiable risk, but hedge their positions so they don't demand a risk premium. C. Although investors must hold diversifiable risk, they don't care about it, so there is no risk premium. D. Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.
Q5: Which of the following statements are true about early option exereise (for American style options)? (Assume r > 0.) 1. It is never optimal to early exercise a call option on a non-dividend paying stock. 2. It is never optimal to early exercise a put option on a non-devidend paying stock.