Plazo y forma de justificación

C. Sell a stock

D. Wait for the stock price to rise

Type: Difficult

True / False Questions

49. A call options gives its owner the right to buy stock at a fixed strike price during a specified period of time.

TRUE

Type: Easy

50. An European option gives its owner the right to exercise the option at any time before expiration.

FALSE

51. If you write a put option, you acquire the right to buy stock at a fixed strike price.

FALSE

Type: Medium

52. The writer of a put option loses if the stock price declines.

TRUE

Type: Medium

53. Position diagrams and profit diagrams are one and the same.

FALSE

Type: Medium

54. An investor can get downside protection by buying a stock and a put option.

TRUE

Type: Difficult

55. Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

TRUE

Type: Difficult

56. Options can have a value even when the stock is worthless.

FALSE

Type: Medium

57. For an European option: Value of call + PV(exercise price) = Value of put + share price.

TRUE

Type: Medium

58. An increase in the stock price results in an increase in the call option price.

TRUE

Type: Medium

59. An increase in the exercise price results in an equal increase in the call option price.

FALSE

Type: Medium

60. The value of a call option increases with higher volatility of the stock prices.

TRUE

Type: Medium

61. It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

TRUE

Type: Medium

63. All things being equal, the closer an option gets to expiration, the lower the option price.

TRUE

Type: Medium

64. Buying an in the money option will almost always produce a profit.

FALSE

Type: Medium

Short Answer Questions

65. Define the term "option."

An option is defined as a right, but not an obligation, to buy or sell an underlying asset at a fixed price during a specified period of time.

Type: Easy

66. Explain the difference between a European option and an American option.

A European option may be exercised only on the expiration date. An American option may be exercised anytime up to the expiration date.

Type: Easy

67. Define the term "call option."

A call option is defined as a right, but not an obligation, to buy an underlying asset at a fixed price during a specified period of time.

68. Define the term "put option."

A put option is defined as a right, but not an obligation, to sell an underlying asset at a fixed price during a specified period of time.

Type: Easy

69. Briefly explain how position diagrams are useful?

Position diagrams show payoffs at option exercise. Share price is plotted on the x-axis and option value on the y-axis. They are useful in analyzing the position of option buyers and sellers at exercise. They do not consider the cost of options.

Type: Medium

70. Explain the main differences between the position diagrams and the profit diagrams. Position diagrams show payoffs at option exercise. Share price is plotted on the x-axis and option value on the y-axis. They are useful in analyzing the position of option buyers and sellers at exercise. They do not consider the cost of options. Profit diagrams on the other hand consider the cost of options also. Profit diagrams provide a clearer picture of profits and losses resulting from trading in options. They are also helpful in analyzing trading strategies.

Type: Difficult

71. Briefly explain what is meant by "protective put."

The combination of a stock and a put option is known as a "Protective put." It is like buying insurance against declining stock price. The exercise price of the put option provides a floor to investment in stock. The cost of this insurance is the price of the put option.

72. Briefly explain what is meant by put-call parity?

The relationship between the value of a European option and the value of an equivalent put option is called put-call parity. It holds only if the investor is committed to holding the options until the exercise date. It does not hold good for American options.

Type: Medium

73. Discuss the factors that determine the value of a call option.

The value of a call option is determined by five factors. They are: stock price, exercise price, risk free interest rate, volatility of the stock price, and time to expiration.

Type: Medium

74. Briefly explain how an option holder gains from the volatility of the underlying stock price.

An option holder gains from the volatility of the underlying stock price because of the asymmetric payoffs of options. For example, if the stock price falls below the exercise price the call option will be worthless, regardless of whether the drop in the price is only a few cents or many dollars. On the other hand, for every dollar stock price increase above the exercise price will also increase the option price by almost the same amount. Hence, the option holder gains from the increased volatility on the upside, but does not lose on the down side.

Type: Difficult

75. Briefly explain the relationship between risk and option values.

Options on volatile (risky) assets are more valuable than options on safer assets. This is in contrast to most financial settings in which risk is a bad thing and investors have to be paid to bear it. The value of an option increases with the volatility of the underlying stock price.

76. Why would an option holder almost never exercise an option early?

Before expiration, the option value is almost always higher than the value of exercising the option. In the case of a call, the stock price less the exercise price is almost always less than the option price due to volatility and time. As such, the better choice is to sell the option and realize a higher profit.

Type: Difficult