More Options, and a Forward a. (1 point) Which is worth more on a non-dividend-p

Question

More Options, and a Forward

a. (1 point) Which is worth more on a non-dividend-paying stock when interest rates are zero:

a) An at-the-money call

b) An at-the-money put

c) They are worth the same

d) It depends on the volatility of the underlying asset

CIRCLE ONE: A B C D

b. (1 point) How do the equity and debt financing of a company relate to options pricing?

a) Equity is like a long call, debt is like a long put

b) Equity is like a long call, debt is like a short put

c) Equity is like a short call, debt is like a long put

d) Equity is like a short call, debt is like a short put

CIRCLE ONE: A B C D

c. (2 points) Microsoft is currently at $100. The annual interest rate is 20%. Microsoft pays a $10 dividend at the end of every year. What is the fair forward strike on a two-year forward?

Answer:

Explanation / Answer

1.

Put call parity states that: S+P=C+Xe^(-rt)

At r=0: S+P=C+X

For AtM, S=x hence C=P

They are worth the same

2

Equity is like a long call and debt is like a short put

3

Fair value=(100-10*e^(-1*20%)-10*e^(-20%*2))*e^(20%*2)=126.968

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