Suzanne Evans
Well-Known Member
Questions:
210.1. The price of a European call, that has a strike price of $10.00 and expires in one year, is exactly $1.00 when the underlying stock price is $9.00 and the risk-less rate is 3.0% with continuous compounding. The stock expects a $2.00 dividend in six months. If a European put option, with identical maturity and strike price, trades at $3.00, what is the arbitrage opportunity?
a. No arbitrage possible
b. Short the put for $0.35 present value (PV) profit
c. Buy the put for $0.67 PV profit
d. Invest in cash for $1.08 PV profit
210.2. A non-dividend-paying stock is currently priced at $50.00 while the riskless rate is 4.0% per annum. An at-the-money (ATM) put option (i.e., strike of $50.00) with a nine months to expiration has a price of $4.00. What is the net initial cost to write a covered call ("buy-write") if the written call option is also at-the-money (ATM) with nine months to expiration?
a. $9.05
b. $15.67
c. $44.52
d. $50.00
210.3. According to Hull, each of the following is true about the role of dividends (D) in options, where D = present value of dividends during the life of the option, EXCEPT for which is false:
a. Put-call parity is easily adjusted for the impact of dividends on European options: c + D + K*exp(-rT) = p + S(0)
b. Although put-call parity does not hold for American option, upper/lower bounds that include dividends do apply: S(0) - D - K <= C - P <= S(0) - K*exp(-rT)
c. An increase in the amount of future dividends, ceteris paribus, will always increase the value of a European/American put option
d. When a stock pays dividends, it is never optimal to early exercise an American call option
Answers:
210.1. The price of a European call, that has a strike price of $10.00 and expires in one year, is exactly $1.00 when the underlying stock price is $9.00 and the risk-less rate is 3.0% with continuous compounding. The stock expects a $2.00 dividend in six months. If a European put option, with identical maturity and strike price, trades at $3.00, what is the arbitrage opportunity?
a. No arbitrage possible
b. Short the put for $0.35 present value (PV) profit
c. Buy the put for $0.67 PV profit
d. Invest in cash for $1.08 PV profit
210.2. A non-dividend-paying stock is currently priced at $50.00 while the riskless rate is 4.0% per annum. An at-the-money (ATM) put option (i.e., strike of $50.00) with a nine months to expiration has a price of $4.00. What is the net initial cost to write a covered call ("buy-write") if the written call option is also at-the-money (ATM) with nine months to expiration?
a. $9.05
b. $15.67
c. $44.52
d. $50.00
210.3. According to Hull, each of the following is true about the role of dividends (D) in options, where D = present value of dividends during the life of the option, EXCEPT for which is false:
a. Put-call parity is easily adjusted for the impact of dividends on European options: c + D + K*exp(-rT) = p + S(0)
b. Although put-call parity does not hold for American option, upper/lower bounds that include dividends do apply: S(0) - D - K <= C - P <= S(0) - K*exp(-rT)
c. An increase in the amount of future dividends, ceteris paribus, will always increase the value of a European/American put option
d. When a stock pays dividends, it is never optimal to early exercise an American call option
Answers:
