Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

FNCE 30007 Derivative Securities

Tutorial Questions

Option properties

Question 1

What is the lower bound for the price of a six-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?

Question 2

The price of a European call that expires in six 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 two months and again in five months. The term structure is flat, with all risk-free interest rates being 10%. What is the price of a European put option that expires in six months and has a strike price of $30?

Question 3

Explain the arbitrage opportunities available to you in the previous question if the European put price is $3.

Question 4

Explain why the early exercise of an American put becomes more attractive as the risk-free rate increases and volatility decreases.

Question 5

The price of a European put (exercise $30, maturity of 2 years) on one XYZ share is $6. The current XYZ stock price is $20 and XYZ is not expected to pay any dividends over the next 3 years. The continuously compounded risk-free rate is 10% per annum.

a) What is the price of a European call option on one XYZ share that expires in 2 years and has a strike price of $30?

b) Assume the current price of the call option in part (a) is $1.00. What opportunities are available to you?

Question 6

Use the put-call parity to show that writing a covered call is not the same as writing a put.