Consider a call option on stock XYZ with six months remaining to maturity. In a crisis, the volatility of the share increases and the share price drops. We should expect that: Multiple Choice О the value of the call option increases the value of the call option decreases it is uncertain if the value of the call option increases or decreases

Consider a call option on stock XYZ with six months remaining to maturity. In a crisis, the volatility of the share increases and the share price drops. We should expect that: Multiple Choice О the value of the call option increases the value of the call option decreases it is uncertain if the value of the call option increases or decreases

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter15: Shareholders’ Equity: Capital Contributions And Distributions

Section: Chapter Questions

Problem 5Q

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Similar questions

Which of the following positions in options benefit if the underlying stock price increases? Assume the options have several months remaining until the exercise date. a. Short position in call and long position in put b. Short position in both call and put c. Long position in a put d. Long position in call and short position in put e. Short position in a call f. Short position in a put g. Long position in a call
Volatility smile” is referred to as evidence against the Black-Scholes model. Why is that? A) Black-Scholes model assumes that different options on a given stock have different values for implied volatility b.) Volatility of returns on one and the same stock, over one and the same future period of time, can only take one value C) Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used
What will happen to a stock’s risk premium if its beta doubles and the market risk premium doubles? A. The risk premium will be unchanged. B. The risk premium will decrease by a factor of 2. C. The risk premium will increase by a factor of 4. D. The risk premium will increase by a factor of 2.
A stock has not been fluctuating much in price. Its average price is $20/share. You expect that the stock price behaves the same way in the next year. A one-year put option is selling for $5, which has an exercise price of $20. Suppose the risk-free rate is 0.05. To make use of your expectation in the future price movement, you establish a straddle strategy to maximize your profits. If the stock price actually ends up at $20 in a year, your profit is $ . Give your answer to 2 decimal places.
Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT? a. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase. b. If both expected inflation and the market risk premium (rM – rRF) increase, the required returns of both stocks will increase by the same amount. c. Since the market is in equilibrium, the required returns of the two stocks should be the same. d. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase. e. If both expected inflation and the market risk premium (rM – rRF) increase, the required return on Stock HB will increase by…
If the stock price falls and the call price rises, then what has happened to the call option’s implied volatility?
Which of the following describes a situation where an American call option on a stock becomes more likely to be exercised early? Select one alternative: O All of the others. O The stock price volatility increases. O Maturity is longer. O Expected dividends increase.
The cost of a portfolio consisting of a long position in a call option with strike price 50 and a short position in a call option with strike price 80 is zero (both call options are on the same stock and have the same maturity date). True or false? Explain.
Which of the following strategy would you adopt if you expect the fall in prices of a stock? A. Buy a call B. Sell a call C. Sell a put D. Buy a future
4. What volatility smile is likely to be observed when: (a) Both tails of the stock price distribution are less heavy than those of the lognormal distribution? (b) The right tail is heavier, and the left tail is less heavy, than that of a lognormal distribution? 5. Using Table below calculate the implied volatility a trader would use for an 8-month option with K/SO = 1.04.
At time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image.Assume no-arbitrage pricing. Show analytically that if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.
Select all that are true with respect to the Black Scholes Option Pricing Model (OPM) in practice): Group of answer choices BSOPM assumes that the volatility of the underlying stock returns is constant over time. BSOPM assumes that the underlying stock can be traded continuously. BSOPM assumes that there are no transaction costs. There is only one input to the BSOPM that is not observable at the time you are valuing a stock option, and that input is volatility. Implied volatility is estimated by calculating the daily volatility of the underlying stock’s return that occurred over the prior six months.