Please answer the following questions:
1A. The effect of volatility on a call/putâs price is
a. decreased price due to decreased possible losses
b. nominal volatility will not noticeably effect a call/putâs price.
c. increased price due to increased possible gains
d. decreased price due to increased possible losses
e. none of the above.
1B. A portfolio that combines the underlying stock and a short position in an option is called
a. a risk arbitrage portfolio b. a hedge portfolio c. a ratio portfolio
d. a two-state portfolio e. none of the above
1C. The values of u and d are which of the following?
a. the return on the stock if it goes up and down, respectively.
b. the inverse of the ratio of the up and down probabilities, respectively, and the risk-free rate.
c. the normal probabilities of up and down movements respectively.
d. one plus the return on the return on the stock if it goes up and down, respectively
e. none of the above
1D. Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. The call has an exercise price of 80.
What would be the callâs price if the stock goes up?
a. 3.60 b. 8.00 c. 5.71 d. 4.39 e. none of the above
1E. All of the following are variables used to determine a call optionâs price except
a. the risk-free rate b. the probability of stock price movement c. the exercise price
d. the possible future stock price at expiration e. none of the above
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