Baran

The  correct answer is C

The upper bound on a European call option is the stock price, so it can’t be worth $55.

Baran

AIM 3: Explain put-call parity and calculate, using the put-call parity on a nondividend-paying stock, the value of a European and American option, respectively.

 

1、A put option on DCY stock matures six months from today and sells for $0.49. A call option on DCY stock with the same strike price sells for $4.52. Both the put and the call are European options. DCY stock is priced at $55 and the risk-free rate of interest is 4 percent. The strike price of the put and call options is closest to:

A) $51.
 
B) $53.
 
C) $52.
 
D) $50.

Baran

2、What is the primary difference between an American and a European option?

 

A) The European option can only be traded on overseas markets. 
 
B) The American option can be exercised at anytime on or before its expiration date.
 
C) American and European options always have different strike prices when written on the same underlying asset. 
 
D) American and European options are never written on the same underlying asset. 

Baran

AIM 2: Identify, interpret and compute upper and lower bounds for option prices.

1、ABEX Corporation common stock is selling for $50.00 per share. Both an American call option and a European call option are available on ABEX common, and each have identical strike prices and expiration dates. Which of the following statements concerning these two options is TRUE?

 

A) Because the American and European options have identical terms and are written against the same common stock, they will have identical option premiums.
 
 
B) The American option will have a higher option premium, because the American security markets are larger than the European markets.
 
 
C) The greater flexibility allowed in exercising the American option will normally result in a higher market value relative to an otherwise identical European option.
 
 
D) The European option will normally have a higher option premium because of their relative scarcity compared to American options.

Baran

The  correct answer is C

Trading in European options is considerably less than trading in American options, because demand for them is much lower. This is due to their relative inflexibility regarding when they can be exercised. The greater exercising flexibility of American options gives them increased value to traders, which normally results in a greater market value relative to an otherwise identical European option.

Baran

The  correct answer is B

Increased volatility positively influences put and call option values, while a decrease in time to expiration will negatively influence call and put prices. Note that an increase in the stock price and an increase in the risk-free rate will cause the price of an American call to increase but will cause the price of an American put to decrease.

Baran

2、Put option values increase as a result of increases in which of the following factors?

  I. Volatility.
 II. Dividends.
III. Stock Price.
IV. Time to expiration.
A) I, III, and IV only. 
 
B) I, II, and IV only. 
 
C) II and IV only. 
 
D) I and III only. 

Baran

The  correct answer is B
Put option values decrease as stock prices increase.