QUESTION 2 a. Consider three at-the-money (ATM) European call options (i.e., S = X for each of them) written on the same
Posted: Tue Apr 26, 2022 10:45 am
QUESTION 2
a. Consider three at-the-money (ATM) European call options
(i.e., S = X for each of them) written on the same underlying
asset, with the following common parameter
values: r = 0% p.a. and =
100% p.a. However, one of the options matures in T = 12
months, another in T = 24 months, and the last
one matures in 36 months. Based on the premiums of
these three call options, what do you conclude regarding the
relationship between the call premium and time to maturity?
The relationship between the call option's premium and
its time to maturity is U-shaped.
The call option premium increases as time to maturity
increases.
There is no relationship between the call option's premium
and its time to maturity.
The call option premium decreases as time to maturity
increases.
The call option premium remains the same as time to maturity
increases.
b. Consider three at-the-money (ATM) European PUT options (i.e.,
S = X for each of them) written on the same underlying asset,
with the following common parameter
values: r = 0% p.a. and =
100% p.a. However, one of the options matures in T = 12
months, another in T = 24 months, and the last
one matures in 36 months. Based on the premiums of
these three put options, what do you conclude regarding the
relationship between the put premium and time to maturity?
The put option premium remains the same as time to maturity
increases.
The relationship between the put option's premium and
its time to maturity is U-shaped.
There is no relationship between the put option's premium
and its time to maturity.
The put option premium decreases as time to maturity
increases.
The put option premium increases as time to maturity
increases.
a. Consider three at-the-money (ATM) European call options
(i.e., S = X for each of them) written on the same underlying
asset, with the following common parameter
values: r = 0% p.a. and =
100% p.a. However, one of the options matures in T = 12
months, another in T = 24 months, and the last
one matures in 36 months. Based on the premiums of
these three call options, what do you conclude regarding the
relationship between the call premium and time to maturity?
The relationship between the call option's premium and
its time to maturity is U-shaped.
The call option premium increases as time to maturity
increases.
There is no relationship between the call option's premium
and its time to maturity.
The call option premium decreases as time to maturity
increases.
The call option premium remains the same as time to maturity
increases.
b. Consider three at-the-money (ATM) European PUT options (i.e.,
S = X for each of them) written on the same underlying asset,
with the following common parameter
values: r = 0% p.a. and =
100% p.a. However, one of the options matures in T = 12
months, another in T = 24 months, and the last
one matures in 36 months. Based on the premiums of
these three put options, what do you conclude regarding the
relationship between the put premium and time to maturity?
The put option premium remains the same as time to maturity
increases.
The relationship between the put option's premium and
its time to maturity is U-shaped.
There is no relationship between the put option's premium
and its time to maturity.
The put option premium decreases as time to maturity
increases.
The put option premium increases as time to maturity
increases.