Part I: Which of the following call options (X is the exercise price and T is ti

Question

Part I: Which of the following call options (X is the exercise price and T is time to maturity) has the highest value (all options are on the same underlying stock)? Explain

A. X=150; T=.5

B. X=150; T=.25

C. X=120; T=.25

D. X=120; T=.5

E. We can’t tell without further information

Part II: Which of the following put options (X is the exercise price and T is time to maturity) has the highest value (all options are on the same underlying stock)? Explain

A.

X=150; T=.5

B.

X=150; T=.25

C.

X=120; T=.25

D.

X=120; T=.5

E.

We can’t tell without further information.

Part III: You can sell a call on a stock that you do not own? Explain

True

False

A.

X=150; T=.5

B.

X=150; T=.25

C.

X=120; T=.25

D.

X=120; T=.5

E.

We can’t tell without further information.

Explanation / Answer

D. X=120; T=.5

The lower the price and higher the maturity, higher the value of call opton

X=150; T=.5

True; since the payoff is based on the price differential and not on actual delivery

X=150; T=.5

The higher the price and higher the maturity, higher the value of put opton

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