Quiz%206%20practice%20problems

Quiz%206%20practice%20problems - price. Call option prices...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Quiz VI Practice Problems Econ 435 1) X is the price of a call option with a strike of 90 on a stock currently trading at 100 with an implied volatility of 30% Y is the price of a call option with a strike of 90 on a stock currently trading at 110 with an implied volatility of 50% Z is the price of a call option with a strike of 90 on a stock currently trading at 110 with an implied volatility of 30% All three options expire on the same date. Rank X,Y,Z from highest to lowest. Answer: Y > Z > X Y and Z have the same strike and stock price. Y’s stock has a higher implied volatility. Call option prices increase with volatility and stock price, thus: Y>Z X and Z have the same strike and implied volatility. Z’s stock has a higher
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: price. Call option prices increase with stock price, thus: Z>X. 2) An Option on stock XYZ has a delta of .5 a gamma of 0 a 7-day theta of -.1 a rho of 2 and a vega of 1. By how much will option XYZs price change if one week from today stock XYZ has decreased by $1 and stock XYZs implied volatility has increased by 1% and everything else remains unchanged? stock XYZ has decreased by $1 Option decreases by delta*$1 = $.5 stock XYZs implied volatility has increased by 1% Option increases by vega*1 = $1. One week goes by Option decreases by Theta*1 = $.1 Total change in option value = -.5 + 1 -.1 = $.4...
View Full Document

Ask a homework question - tutors are online