[The following information applies to the questions displayed below.] Similarly, we estimate the fair value of stock options at the grant date and expense it over the service period, usually from the date of grant to the vesting date. Fair value is estimated at the grant date using an option-pricing model that considers the exercise price and expected term of the option, the current market price of the underlying stock and its expected volatility, expected dividends, and the expected risk-free rate of return.     Knowledge Check 01 On January 1, Year 1, Abbott Company granted 92,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3, and expire on January 1, Year 7. Each option can be exercised to acquire one share of $1 par common stock for $14. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. What is the amount of compensation expense for Year 1? Note: Round your answer to the nearest dollar amount.

4. Answer the following questions on exotic options: (a) Discuss the differences between a combination and a spread when constructing portfolios of options. (b) Define a long strangle and represent the profit function. (c) Design a forward contract on a stock with a particular delivery price and delivery date as a combination of options on the same underlying asset.

(15) The is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. *A) intrinsic value B) time value C) stated value D) discounted value

Real Options & Game Theory: The value of a call option and a put option is influenced by the following variables: - Underlying asset value- Strike Price- Variance of Underlying asset- Time to Expiration What effect would an increase in each of these variables have on the value of a calloption and a put option?

What are the steps in valuing a call option when the binomial tree describing an underlying stock price has more than one sequential up/down jumps?

A speculative investor creates a portfolio of options written on the same underlying asset. He chooses to sell a put option with a strike of $100 and sell a call option also with a strike of $100. The two options have the same expiration. a. Sketch the payoff at maturity for a seller of a put option with a strike of $100. Carefully label the axes. b. Sketch the payoff at maturity for a seller of a call option with a strike of $100. Carefully label the axes. c. Sketch the payoff at maturity for the investor who sells both a call option and a put option each with a strike of $100. Carefully label the axes. The put option price is $14, and the price of the call option is $6. d. What is the profit at maturity for the speculative investor if the underlying asset at maturity is worth $100?

k) define a protective put.     l) demonstrate an understanding of the position of buying a protective put by identifying the breakeven stock price, the maximum profit, and the maximum loss.     m) discuss the similarities between a protective put and an insurance policy.       n) discuss the similarities between the exercise price in a protective put and the deductible in an insurance policy.        o) demonstrate an understanding of the constructions of a synthetic put by identifying the breakeven stock price, the maximum profit, and the maximum loss.

Current GAAP recommends that the fair value method be used to account for compensatory stock option plans. From a conceptual point of view, this method is an improvement over the intrinsic value method. Required: Explain how the fair value method is an improvement over the intrinsic value method.

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price shorting the underlying stock, lending the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price buying the underlying stock, borrowing the present value of the exercise price; and writing a put on the same underlying stock and with the same exercise price

IDENTIFYING AN OPTION POSITIONS: (Shares per Contract) One standardized option contract represents ___ ____ shares of _____ stock. Options could represent more than ____-_____ shares of stock if there is a stock _____ or stock _____ on the underlying security.