Quick Fire Questions

Question 1

How are option contracts standardised?

Answer 1

1. The underlying asset
2. Contract size
3. Expiration date
4. Exercise style

Question 2

Advantages of standardised contracts

Answer 2

1. Liquidity
2. Efficient
3. Promotes transpareny

Question 3

Disadvantages of standardised contracts

Answer 3

1. Limited customisation
2. One-size-fits all approach
3. Unique risk exposures

Question 4

Intrinsic value definition

Answer 4

The real or actual value of the option

Question 5

Time value definition

Answer 5

The extra value an option has beyond its intrinsic value.

Question 6

Assumptions to simplify the analysis of financial markets

Answer 6

1. Frictionless capital markets
2. No arbitrage
3. A risk-free rate exists

Question 7

What is put-call parity?

Answer 7

The relationship between prices of European call and put options

Question 8

What does the put-call parity equation state?

Answer 8

That the difference between the price of a call option and a put option should be equal to the difference between the current stock price and the present value of the strike price

Question 9

In what circumstance would you pay more for a call option?

Answer 9

When s=x

Question 10

What is the purpose of early exercise of American puts?

Answer 10

To capitalise on the options intrinsic value.