10. The higher the amount of dividends a stock pays, the a the lower its dividen
ID: 2790208 • Letter: 1
Question
10. The higher the amount of dividends a stock pays, the a the lower its dividend yield e the value of a call will increase inmediately after the ex-dividend day d the lower the value of a call option I1. Buying and selling a call option on the same stock with the same strike price and expiration date is a a strip b. straddle c. spread d split 12. Ifan investor buys a call with a strike price of $90 nd the underlying stock at the time of expiration is S%, what is her profit or loss per share if she paid the writer $4 a share? a. $2 d-$2. 13. A(n)--will increase the market value of a put option. a interest rate change b increase in the dividend rate of the underlying stock c. decrease in the volatility of the underlying stock. d. decrease in the earnings rate of the underlying stock 14. A(n)--willincrease the market value of a call option. a decrease in the announced dividend amount. b decrease in the time to expiration. c. decrease in the volatility of the underlying stock d. increase in the interest rate. 15. An important assumption of put-call parity is that a both options may have different exercise prices but the same expiration dates. b. both options have the same exercise prices and the same expiration dates. c. both options will produce the same payoff on the stock as well as a risky bond d both options will produce the same payoff on the stock as well as another risky asset 16.-, buy and sell futures contracts to offset an otherwise risky position in the spot market. a. Speculators. b. Floor brokers. c. Market makers. d. Hedgers 17. Futures contracts are standardized in terms of as well as the type of asset that is permissible for delivery. a liability b. location c. delivery d. markets
Explanation / Answer
10) d: lower the value of call option
Reason : After paying dividend, stock price tends to go down which will make premium of call option to go down. Thus higher the dividend greater the effect
11) b : straddle
This strategy is use when one has expectation that market will move significantly in one direction. For eg Elections
12) a :$2
Statement showing payoff
13) d : decrease in earnings of underlying stock.
With decrease in earnings stock price will go down thus increasing value of put option
14) d : increase in interest rate
increase in intereat rate will have positive effect on value of call option
15) b) both options have same exercise prices and same expiration dates
16) d: Hedgers
Hedgers are generally big institution who want to protect themself from unexpected events
17) a : liability
Future contracts are standardise contracts that are traded on exchange , hence there is no risk of counter party default
Particulars Amount Strike price of call option 90 Price at expiry 96 Exercise or not Yes Profit on expiration 6 Less: Premium paid 4 Profit 2Related Questions
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