01 Week

Question 1

What is an option

Answer 1

Right to buy/sell an asset in the future at some predetermined price

Question 2

What is a strike or exercise price X?

Answer 2

Price at which underlying can be bought or sold

Question 3

What is a maturity or expiration date?

Answer 3

Date the option matures

Question 4

What is an American option

Answer 4

Exercise possible any time until expiration

Question 5

What is an European option

Answer 5

Exercise possible at expiration only

Question 6

What is a Call option?

Answer 6

Call options give you the right to buy

Question 7

What is a Put option?

Answer 7

Put options give you the right to sell

Question 8

What is the exercise gain of a call?

Answer 8

max[0 , S-X]

Question 9

What is the exercise gain of a put?

Answer 9

max[0, X-S]

Question 10

Profit of the buyer (long) is equal to …

Answer 10

… the loss of the seller (short)

Question 11

What is the Put-call-parity

Answer 11

S-B = C-P

Question 12

What are the assumptions of the One-step Binomial Model

Answer 12

Assumptions:

• Stock price S follows multiplicative binomial process
• Trading occurs only at discrete times

Question 13

Which relationships must hold in a market equilibrium?

Answer 13

1+r_f > d
u > 1+ r_f

r_f: risk-free rate

d: multiplicative downward movement in the stock price
u: multiplicative upward movement in the stock price

Question 14

How can p in the Binomial Model be interpreted

Answer 14

p can be interpreted as a probability for the upward movement in a world with risk-neutral investors.

p is called the risk-neutral probability.

In real world q lager then p.

Question 15

How is p called?

Answer 15

p is called the risk-neutral probability

Question 16

For what option is the value of an American option equal to the value of a European option.

Answer 16

For a non-dividend paying stock the Value of an American call is equal to the value of an European call.
his is bc it is never optimal for exercise this call pre-maturely

Question 17

Assumptions of the Black-Scholes Option Pricing Formula

Answer 17

• Stock price moves randomly in continuous time
• No dividends
• No market friction
  (European Call)

Question 18

Define no market friction

Answer 18

• no arbitrage opportunities
• no transaction costs
• no interest rates
• no short-sale restrictions

Question 19

What is the Problem with the NPV-Methode

Answer 19

the NPV-Methode is not suitable for flexible, multi-period decision making under uncertainty

Question 20

What is an Expansion option?

Answer 20

Growth option on an underlying asset that assumes precommitment of a series of investments to growing demand over time (American call)

Question 21

What is a Contraction option?

Answer 21

Option to receive cash for partially giving up the use of asset (American put)

Question 22

What is an Abandonnment option?

Answer 22

Right to sell an asset for given price, which can change through time rather than continuing to hold it (American put)

Question 23

What is an Extentsion option?

Answer 23

Allows manager to pay a cost for the ability to extend the life of a project (European call with cost of extension as exercise price) (European Call)

Question 24

What is a Defferal option?

Answer 24

Right to defer the start of a project (American call)

Question 25

What is a Switching option?

Answer 25

Right to turn a project on and off

Question 26

What is a Compound option?

Answer 26

Options on options

Question 27

How is calculation an expected NVP called?

Answer 27

Decision-Tree-Analysis (DTA) -> wrong result -> User Real-Optionpricing-Analysis (ROA)

Question 28

What is the Problem with the DTA?

Answer 28

We do not know the appropriate WACC to work with

Question 29

Three Key Assumptions for Pricing Real Options

Answer 29

1. Present value of project without flexibility can be used as twin security
2. Real option pricing obeys the pronciple of no-arbitrage
3. Properly anticipated prices fluctuate randomly