MGTC71-T2-2A - UNIVERSITY OF TORONTO AT SCARBOROUGH...

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UNIVERSITY OF TORONTO AT SCARBOROUGH DEPARTMENT OF MANAGEMENT MGTC71: Introduction to Derivatives Markets Test-2 Supplement Questions (Option Basics + Option Strategy)
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2 Problem-1 [6 Points]: Answer the following short questions. a) [3 Points] An American call is always worth more than a European call? Agree/Disagree, explain why? Solution: Disagree when there is no Dividend, they are worth the same. b) [3 Points] It is riskier to have (i.e. you can lose more money on) a short position in a call option than a short position in a put option. Agree/Disagree explain why? Solution: Agree, because Losses on a short call option are unbounded while the loss on a short put is –K.
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3 Problem-2 [12 Points]: A stock is currently selling for $100. The current price of a 6-month call option on the stock with an exercise price of $105 is selling for $12. The risk-free interest rate is 5%, compounded continuously. a)
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This note was uploaded on 07/20/2011 for the course MGMT 71 taught by Professor Mazaheri during the Spring '11 term at University of Toronto- Toronto.

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MGTC71-T2-2A - UNIVERSITY OF TORONTO AT SCARBOROUGH...

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