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Seminar 9 - Questions

1. Explain the difference between writing a call option and buying a put option.
2. Briefly explain the six factors affecting stock option prices.
3. Elaborate on the following terms:
(i)
(ii)
(iii)

ATM option
ITM option
OTM option

4. Briefly explain the put-call parity. Explain why the arguments leading to put-call
parity for European options cannot be used to give a similar result for American
options.
5. Consider an exchange-traded call option contract to buy 500 shares with a strike
price of $40 and maturity in 4 months. Explain how the terms of the option contract
change when there is (a) a 10% stock dividend and (b) a 4-for-1 stock split.
6. A US investor writes five naked call option contracts. The option price is $3.50, the
strike price is $60.00, and the stock price is $57.00. What is the initial margin
requirement?
7. What is a lower bound for the price of a four-month call option on a non-dividendpaying stock when the stock price is $28, the strike price is $25, and the risk-free
interest rate is 8% per annum?
8. What is a lower bound for the price of a one-month European put option on a nondividend-paying stock when the stock price is $12, the strike price is $15, and the
risk-free interest rate is 6% per annum?
9. What is a lower bound for the price of a 2-month European put option on a nondividend-paying stock when the stock price is $58, the strike price is $65, and the
risk-free interest rate is 5% per annum?
10. A 1-month European put option on a non-dividend-paying stock is currently
selling for $2.50. The stock price is $47, the strike price is $50, and the risk-free
interest rate is 6% per annum. What opportunities are there for an arbitrageur?
11. The price of a European call that expires in 6 months and has a strike price of $30
is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in 2
months and again in five months. The term structure is flat, with all risk-free interest
rates being 10%. What is the price of a European put option that expires in 6 months
and has a strike price of $30?
12. A US trader buys a European call option on the USD/GBP in order to buy
2,000,000 at USD/GBP 1.5815 in six months. The premium is 2 USD cents per
GBP. The exchange rate is currently at USD/GBP = 1.5815. Under what
circumstances does the trader make a profit? Under what circumstances will the

option be exercised? Draw a diagram showing the variation of the traders profit
with the exchange rate price at the maturity of the option.
How your answer would change in the trader was buying a European put option on
the same exchange rate in order to sell 2,000,000?
13. Calculate the price of a three-month European put option on a non-dividendpaying stock with a strike price of $50 when the current stock price is $50, the riskfree interest rate is 10% per annum, and the volatility is 30% per annum.
14. What difference does it make to your calculations in the above question if a
dividend of $1.50 is expected in two months?
15. What is the price of a European call option on a non-dividend-paying stock when
the stock price is $52, the strike price is $50, the risk-free interest rate is 12% per
annum, the volatility is 30% per annum, and the time to maturity is three months?
16. What is the price of a European put option on a non-dividend-paying stock when
the stock price is $69, the strike price is $70, the risk-free interest rate is 5% per
annum, the volatility is 35% per annum, and the time to maturity is six months?