Book 4_Derav_READING 75_PRICING-AND-VALUATION-OF-OPTIONS Flashcards
1
Q
If immediate exercise of an option would generate a positive payoff
A
the option is in the money
2
Q
If immediate exercise would result in a negative payoff
A
the option is out of the money
3
Q
An option’s exercise value
A
the greater of zero or the amount it is in the money
4
Q
Time value is
A
- the amount by which an option’s price is greater than its exercise value (S - X)
- zero at expiration.
5
Q
The approach for pricing contingent claims is
A
different from the model for forward commitments because contingent claims have one-sided payoffs and values at initiation that are not equal to zero.
6
Q
A replication model for European options
A
is based on the value of a portfolio in which the option is combined with a pure discount bond and a long or short position in the underlying
7
Q
European call
A
- Minimum value: Ct >= max (0, St - X(1-Rt)^(-T-t))
- Max: St
8
Q
European Put
A
- Minimum value: Ct >= max (0, X(1-Rt)^(-T-t) - St)
- Max: X(1-Rt)^(-T-t)
9
Q
Factors affect the value of an option
A
- Price of underlying asset
- Exercise price
- Risk-free rate
- Volatility of underlying asset
- Time to expiration
- Cost and benefit of holding asset
