All else held constant, which of the following would make the put option on the common stock more valuable? A lower exercise price Stock price drops Stock price volatility reduces
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- Problem 4d: State whether the following statements are true or false. In each case, provide a brief explanation. d. In a binomial world, if a stock is more likely to go up in price than to go down, an increase in volatility would increase the price of a call option and reduce the price of a put option. Note that a static position is a position that is chosen initially and not rebalanced through time.The zero-growth model of stock valuation; a. implies a zero growth in stock price over time b. implies a constant required return c. implies a discounted perpetuity d. No option is correctIf you are creating an option play that benefits from a VOLATILITY strategy, you expect the stock price to do what? ○ Go down Go up OR down, by a lot Go up O Remain right around its current price
- 11. Which of the following will increase the value of a put option? 1 A decrease in the time to expiration. 2 A decrease in the exercise price. 3 A decrease in volatility. 4 An increase in volatility. (Ctrl)In a binomial tree created to value an option on a stock, what is the expected return on the option? O Zero O The return required by the market O The risk-free rate O It depends on the volatility ALAn increase in the volatility of returns of the underlying stock (and holding everything else constant): A. Decreases both call and put option values B. Increases both call and put option values C. Increases put option values but not call option values D. Decreases call option values but not put option values E. Increases call option values but not put option values
- Which of the following statements true? A call option price is increasing in stock return volatility A put option price is decreasing in stock return volatility I. II. A) I. and II. are true B) I. is true and II. is false C) II. is true and I. is false D) I. and II. are false |Why do call options with exercise prices greater than the price of the underlying stock sell for positive prices?Which of the following would increase the price of a put option on common stock , all else equal? I. Decrease in stock price II . Decrease in stock price volatility III . Decrease in time to maturity IV . Increase in exercise price II , and IV l and IV I only I III , and IV IV only
- 6. Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep in- or out-of-the- money.Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.Suppose you observe the following situation: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Bust 0.22 -0.12 -0.27 Normal 0.48 0.1 0.05 Boom 0.3 0.23 0.28 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?