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Seminar 9 - Questions

The document contains 16 questions about options pricing and concepts. The questions cover topics such as the difference between calls and puts, factors affecting option prices, definitions of terms like ATM, ITM, and OTM options, put-call parity, and how option contract terms change due to corporate actions. Several questions involve calculating theoretical option prices using the Black-Scholes model under various assumptions about the stock price, strike price, risk-free rate, volatility, and time to maturity.

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160 views2 pages

Seminar 9 - Questions

The document contains 16 questions about options pricing and concepts. The questions cover topics such as the difference between calls and puts, factors affecting option prices, definitions of terms like ATM, ITM, and OTM options, put-call parity, and how option contract terms change due to corporate actions. Several questions involve calculating theoretical option prices using the Black-Scholes model under various assumptions about the stock price, strike price, risk-free rate, volatility, and time to maturity.

Uploaded by

Slice Le
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Seminar 9 - Questions

1. Explain the difference between writing a call option and buying a put option.
2. Briefly explain the six factors affecting stock option prices.
3. Elaborate on the following terms:
(i)
(ii)
(iii)

ATM option
ITM option
OTM option

4. Briefly explain the put-call parity. Explain why the arguments leading to put-call
parity for European options cannot be used to give a similar result for American
options.
5. Consider an exchange-traded call option contract to buy 500 shares with a strike
price of $40 and maturity in 4 months. Explain how the terms of the option contract
change when there is (a) a 10% stock dividend and (b) a 4-for-1 stock split.
6. A US investor writes five naked call option contracts. The option price is $3.50, the
strike price is $60.00, and the stock price is $57.00. What is the initial margin
requirement?
7. What is a lower bound for the price of a four-month call option on a non-dividendpaying stock when the stock price is $28, the strike price is $25, and the risk-free
interest rate is 8% per annum?
8. What is a lower bound for the price of a one-month European put option on a nondividend-paying stock when the stock price is $12, the strike price is $15, and the
risk-free interest rate is 6% per annum?
9. What is a lower bound for the price of a 2-month European put option on a nondividend-paying stock when the stock price is $58, the strike price is $65, and the
risk-free interest rate is 5% per annum?
10. A 1-month European put option on a non-dividend-paying stock is currently
selling for $2.50. The stock price is $47, the strike price is $50, and the risk-free
interest rate is 6% per annum. What opportunities are there for an arbitrageur?
11. The price of a European call that expires in 6 months and has a strike price of $30
is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in 2
months and again in five months. The term structure is flat, with all risk-free interest
rates being 10%. What is the price of a European put option that expires in 6 months
and has a strike price of $30?
12. A US trader buys a European call option on the USD/GBP in order to buy
2,000,000 at USD/GBP 1.5815 in six months. The premium is 2 USD cents per
GBP. The exchange rate is currently at USD/GBP = 1.5815. Under what
circumstances does the trader make a profit? Under what circumstances will the

option be exercised? Draw a diagram showing the variation of the traders profit
with the exchange rate price at the maturity of the option.
How your answer would change in the trader was buying a European put option on
the same exchange rate in order to sell 2,000,000?
13. Calculate the price of a three-month European put option on a non-dividendpaying stock with a strike price of $50 when the current stock price is $50, the riskfree interest rate is 10% per annum, and the volatility is 30% per annum.
14. What difference does it make to your calculations in the above question if a
dividend of $1.50 is expected in two months?
15. What is the price of a European call option on a non-dividend-paying stock when
the stock price is $52, the strike price is $50, the risk-free interest rate is 12% per
annum, the volatility is 30% per annum, and the time to maturity is three months?
16. What is the price of a European put option on a non-dividend-paying stock when
the stock price is $69, the strike price is $70, the risk-free interest rate is 5% per
annum, the volatility is 35% per annum, and the time to maturity is six months?

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