EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 2, Problem 3CP
Summary Introduction
To select: The correct option for the most risky transaction which is undertake in the stock index option market where stock market is expecting increases in sustainability is to be determined.
Introduction : The call option is a contract in which the holder has the right to buy the underlying asset. The call option is a type of the option contract. The option contract is of two types − call option and put option.
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Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Choose the correct.a. Write a call option.b. Write a put option.c. Buy a call option.d. Buy a put option.
Which of the following strategy would you adopt if you expect the fall in prices of a stock?
A. Buy a call
B. Sell a call
C. Sell a put
D. Buy a future
Analyze the value of a call option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?
Chapter 2 Solutions
EBK INVESTMENTS
Ch. 2 - Prob. 1PSCh. 2 - Prob. 2PSCh. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Prob. 5PSCh. 2 - Prob. 6PSCh. 2 - Prob. 7PSCh. 2 - Prob. 8PSCh. 2 - Prob. 9PSCh. 2 - Prob. 10PS
Ch. 2 - Prob. 11PSCh. 2 - Prob. 12PSCh. 2 - Prob. 13PSCh. 2 - Prob. 14PSCh. 2 - Prob. 15PSCh. 2 - Prob. 16PSCh. 2 - Prob. 17PSCh. 2 - Prob. 18PSCh. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Prob. 21PSCh. 2 - Prob. 22PSCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CP
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- Options and Stock Risk If the risk of a stock increases, what is likely to happen to the priceof call options on the stock? To the price of put options? Why?arrow_forwardWhich of the following events are likely to increase the market value of a call option onan ordinary share? Explain.a) An increase in the stock price.b) An increase in the volatility of the stock price.c) An increase in the risk-free rated) A decrease in the time until the option expiresarrow_forwardConsider two put options on the same stock with the same time to maturity. The strike price of Put A is less than the strike price of Put B. Which of the following is true? O It is possible for Put A to be in the money and Put B to be out of the money. O It is possible for Put A to be out of the money and Put B to be in the money. One of the options must be in the money. All of the other answers are correct.arrow_forward
- What impact does each of the followingparameters have on the value of a call option?(1) Current stock pricearrow_forwardSelect all that are true with respect to the Black Scholes Option Pricing Model (OPM) in practice): Group of answer choices BSOPM assumes that the volatility of the underlying stock returns is constant over time. BSOPM assumes that the underlying stock can be traded continuously. BSOPM assumes that there are no transaction costs. There is only one input to the BSOPM that is not observable at the time you are valuing a stock option, and that input is volatility. Implied volatility is estimated by calculating the daily volatility of the underlying stock’s return that occurred over the prior six months.arrow_forwardD3) Finance a) What does the option delta refer to? For a standard European put option, draw the graph of the delta as a function of the price of the underlying asset. b) You have delta hedged a long call position on a stock. The stock price drops. Explain how you would adjust your hedgearrow_forward
- How do call and put options provide a leveraged way of investing in the stock market and enables investors to hedge their risk completely? How do the circumstances under which the addition of an option increase or decrease portfolio risk?arrow_forwardIf the stock price falls and the call price rises, then what has happened to the call option’s implied volatility?arrow_forwardAccording to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.arrow_forward
- What's the key to profitable long call options? A. A large number of at-the-money call options. B. An optionable stock that goes up sufficiently within a certain period. C. An option position that breaks even early enough before expiration. D. In-the-money calls. 4arrow_forwardWhich of the following events are likely to increase the market value of a calloption on a common stock? Explain.a. An increase in the stock’s priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expiresarrow_forwardHow is the intrinsic value of the call option impacted as the stock price changes? How is the time value of the call option impacted as the stock price changes?arrow_forward
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