1) Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. (a) Ignoring t
Posted: Wed May 18, 2022 9:39 pm
1) Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity.
(a) Ignoring the time value of money, under what circumstances will the holder of the option make a profit?
(b) Under what circumstances will the option be exercised?
(c) Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option..
2) Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity.
(a) Ignoring the time value of money, under what circumstances will the seller of the option (the party with the short position) make a profit?
(b) Under what circumstances will the option be exercised?
(c) Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.
3) Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.
(a) Ignoring the time value of money, under what circumstances will the holder of the option make a profit?
(b) Under what circumstances will the option be exercised?
(c) Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option..
2) Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity.
(a) Ignoring the time value of money, under what circumstances will the seller of the option (the party with the short position) make a profit?
(b) Under what circumstances will the option be exercised?
(c) Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.
3) Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.