Chapter 15, 16 Quiz Flashcards
A _____ option allows the option _____ to buy the underlying asset at the option’s exercise price on or before the expiration date.
call; buyer
The difference between a European and an American option is that the European option _____.
can only be exercised on the expiration date
A _____ option allows the option _____ to sell the underlying asset at the option’s exercise price on or before the expiration date
put; buyer
Payoff of purchasing call option
max (0, current price - strike)
payoff for purchasing put option
max (0, strike - current price)
net profit calculation for buying an option
payoff - premium
net profit for purchasing multiple options
options (payoff-premium)
how to calculate breakeven
set net profit to 0, solve
what sets the floor for the market price of a convertible bond?
higher of straight debt value and conversion value
conversion ratio
Number of shares received for converting a convertible bond
conversion price
Face value / conversion ratio
conversion premium
difference between conversion price and stock price
(CP - P) / P
conversion value
CR * Price
Why do call options with strike prices above the current market price of the underlying asset have positive prices?
Because the price of the underlying could go up.
What happens to value when time to expiration increases?
Value increases
