options 1

# options 1 - will be 0.5387 and the price of the call option...

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Old Exam Problems - Options Page 1 of 5 Pages Options 1. American call options and European call options will sell for the same price, because: A. S - E > S - E / (1 + r) t B. S - E < S - E / (1 + r) t C. S - E > S - E / (1 - r) t D. S - E < S - E / (1 - r) t E. They never sell for the same price 1. A stock is currently selling for \$40. The stock price could go up by 8% or fall by 2% each month. The monthly interest rate is 1% (periodic rate). Calculate the price of a call option on the stock with an exercise price of \$40 and a maturity of two months. (use the binomial method) A. \$3.60 B. \$2.34 C. \$1.55 D. \$0.69 E. None of the above u = 1.08; d = .98; P = (1.01 - .98)/(1.08 - .98) = .30; (1-P) = 1 - .30 = .70 2. Assume that a share of stock has a current price of \$65. Also assume that a call option on this stock has 1 year to maturity and that the appropriate 1-year interest rate is 5.00%. Using the N(d) table, you can calculate that when the standard deviation of the continuously compounded annual returns is 0.23, that N(d1) will be 0.6282, N(d2)
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Unformatted text preview: will be 0.5387, and the price of the call option will be \$7.49. Now assume that there is major change in the market, such that the annual interest rate goes up to 8.00% while the standard deviation of return goes down to 0.18, which in turn will force N(d1) up to 0.6976 and N(d2) up to 0.6322. What will be the change in the price of the call option? A. Price of the call will go down by \$0.12 B. Price of the call will remain unchanged C. Price of the call will increase by \$0.12 D. Price of the call will increase by \$0.41 E. None of the above 3. A stock is currently selling for \$50. The stock price could go up by 12% (u = 1.12) or fall by 6% (d = 0.94) each month. The monthly interest rate is 1% (periodic rate). Calculate the price of a call option on the stock with an exercise price of \$50 and a maturity of two months. (Use the binomial method.) A. \$2.04 B. \$3.12 C. \$4.27 D. \$5.49 E. None of the above....
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