Topic 8

Question 1

The put-call parity defines an equilibrium relationship between the price of call and a put option when both options…

Answer 1

…have the same underlying asset, exercise price and expiration date.

Question 2

The valuation of derivatives is based on two underlying principles…

Answer 2

…portfolio replication and the absence of arbitrage opportunities.

Question 3

A strategy similar to a long position in a forward for a given strike price E and written under a given underlying asset Sy…

Answer 3

…Long call position + short put position (if both are written under same underlying asset as the forward St and have also the same strike E and maturity T as the forward.

Question 4

An American option can only be exercised at maturity.

Answer 4

FALSE; not only

Question 5

While features contracts are standardised, forward contracts are not.

Answer 5

TRUE

Question 6

If fan option is “in-the-money”, the investor would loose money if he exercised the options today.

Answer 6

FALSE, he would earn.

Question 7

In a forward contract, one party has the obligation to buy (sell) at a predetermined price, and the other has the option so sell (buy) the asset.

Answer 7

FALSE; both have the obligation.

Question 8

The lower is the option maturity the higher is the CALL price

Answer 8

FALSE; not lower

Question 9

The lower is the option maturity the higher is the PUT price

Answer 9

FALSE; not lower

Question 10

The lower if the volatility of the underlying asset, the higher is the CALL price

Answer 10

FALSE; not lower

Question 11

The higher the volatility of the underlying asset, the higher is the CALL price

Answer 11

TRUE

Question 12

Derivatives are priced…

Answer 12

…under the requirement of no arbitrage opportunities and the existence of replicating portfolio (using the underlying asset and the risk free asset).

Question 13

Market risk

Answer 13

can be transferred by means of derivatives.

Question 14

Derivatives are priced…

Answer 14

…using a replicating portfolio

AND

By imposing non arbitrage conditions between the derivate and the replicating portfolio.

Question 15

According to the put-call parity, the put price will increase when…

Answer 15

the strike price increases.