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Practice Chap 8

Chapter 8 discusses the properties of stock options, including factors affecting their prices and the bounds for European call and put options on non-dividend-paying stocks. It also covers the put-call parity equation and conditions for early exercise of American call options. Additionally, the chapter provides practice questions with specific scenarios to calculate lower bounds and arbitrage opportunities.

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4 views1 page

Practice Chap 8

Chapter 8 discusses the properties of stock options, including factors affecting their prices and the bounds for European call and put options on non-dividend-paying stocks. It also covers the put-call parity equation and conditions for early exercise of American call options. Additionally, the chapter provides practice questions with specific scenarios to calculate lower bounds and arbitrage opportunities.

Uploaded by

Tram Anh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 8 – PROPERTIES OF STOCK OPTIONS

I. Short concept question


8.1. List six factors that affect stock option prices.
8.2. What is the lower bound for a European call option on a stock paying no dividends?
8.3. What is the lower bound for a European put option on a stock paying no dividends?
8.4. What is the put–call parity equation for a stock paying no dividends?
8.5. Under what circumstances should an American call option on a stock be exercised early?
II. Practice questions
8.6. What is a lower bound for the price of a 4-month call option on a non-dividend-paying stock when the
stock price is $28, the strike price is $25, and the risk-free interest rate is 8% per annum? (3.66)
8.7. What is a lower bound for the price of a 6-month call option on a non-dividend-paying stock when the
stock price is $80, the strike price is $75, and the risk-free interest rate is 10% per annum? (8.66)
8.8. What is a lower bound for the price of a 1-month European put option on a non-dividend-paying stock
when the stock price is $12, the strike price is $15, and the risk-free interest rate is 6% per annum? (2.93)
8.9. What is a lower bound for the price of a 2-month European put option on a non-dividend-paying stock
when the stock price is $58, the strike price is $65, and the risk-free interest rate is 5% per annum? (6.46)
8.10. The price of a non-dividend-paying stock is $19 and the price of a 3-month European call option on
the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of a 3-month
European put option with a strike price of $20? (1.8)
8.11. The price of a European call that expires in 6 months and has a strike price of $30 is $2. The underlying
stock price is $29, and a dividend of $0.50 is expected in 2 months and again in 5 months. Risk-free interest
rates (all maturities) are 10%. What is the price of a European put option that expires in 6 months and has a
strike price of $30? (2.51)
8.12. A 1-month European put option on a non-dividend-paying stock is currently selling for $2.50. The
stock price is $47, the strike price is $50, and the risk-free interest rate is 6% per annum. What opportunities
are there for an arbitrageur? (Borrow $49.50 at 6% for one month, buy the stock, and buy the put option)

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