Gypsy

The price of a stock is $44 per share, and the October put with an exercise price of $45 is selling for $3. The intrinsic value of the option is:

A) $1.00.

B) $2.00.

C) $0.00.

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The intrinsic value of a put option at expiration will be the greater of (X-S) or 0. Put Value = max[0, (X-S)], or max [0, (45-44)] = 1.

Gypsy

Which of the following best describes the intrinsic value of an option? The intrinsic value is:

A) highest if an option is at the money.

B) its economic value if it is exercised at maturity.

C) its economic value if it is exercised immediately.

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The intrinsic value of an option is only positive if positive economic value results from exercising the option immediately.

hinsafdar

A call option’s intrinsic value:

A) decreases as the stock price increases above the strike price, while a put option’s intrinsic value increases as the stock price decreases below the strike price.

B) increases as the stock price increases above the strike price, while a put option’s intrinsic value increases as the stock price decreases below the strike price.

C) increases as the stock price increases above the strike price, while a put option’s intrinsic value decreases as the stock price decreases below the strike price.

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For a call option, as the underlying stock price increases above the strike price, the option moves farther into the money, and the intrinsic value is increasing. For a put option, as the underlying stock price decreases below the strike price, the option moves farther into the money, and the intrinsic value is increasing.

hinsafdar

The minimum value for a European call option is:

A) max [0, S − X / (1 + R)T].

B) max [0, (S – X) / (1 + R)T].

C) min [0, S − X / (1 + R)T].

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The minimum value of a European call option is max [0, S − X / (1 + R)T].

hinsafdar

Which of the following statements regarding an option prior to expiration is CORRECT? The maximum value of:

A) a European put is equal to the maximum value of an American put.

B) a European put is less than the maximum value of an American put.

C) an American call is less than the maximum value of a European call.

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The maximum value of a European put is X/(1+R)T and the maximum value of an American put is X.

hinsafdar

Which of the following statements regarding an option prior to expiration is most accurate? The maximum value of a(n):

A) American call is equal to the maximum value of a European call.

B) European call is greater than the maximum value of an American call.

C) American put is equal to the maximum value of a European put.

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The theoretical maximum value of both a European and American call is the price of the underlying stock. The theoretical maximum value of an American put is the exercise price, while the theoretical maximum value of a European put is the present value of the exercise price. Thus the maximum value is less for a European put than for an American put.

hinsafdar

ABEX Corporation common stock is selling for $50.00 per share. Both an American call option and a European call option are available on ABEX common, and each have identical strike prices and expiration dates. Which of the following statements concerning these two options is CORRECT?

A) Because the American and European options have identical terms and are written against the same common stock, they will have identical option premiums.

B) The European option will normally have a higher option premium because of their relative scarcity compared to American options.

C) The greater flexibility allowed in exercising the American option will normally result in a higher market value relative to an otherwise identical European option.

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Trading in European options is considerably less than trading in American options, because demand for them is much lower. This is due to their relative inflexibility regarding when they can be exercised. The greater exercising flexibility of American options gives them increased value to traders, which normally results in a greater market value relative to an otherwise identical European option.

hinsafdar

Compared to European put options on an asset with no cash flows, an American put option:

A) will have the same minimum value.

B) will have a higher minimum value.

C) will have a lower minimum value.

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Early exercise of an in-the-money American put option on an asset with no cash flows can generate more, X − S, than the minimum value of the European option, X / (1 + R)T − S. The possibility of profitable early exercise leads to a higher minimum value on the price of the American put option.

hinsafdar

A non-dividend-paying stock is trading at 62 when the risk-free rate is 5%. The minimum values for 6-month American and European calls on the stock with a strike price of 50 are closest to:

American call

European call

A) $13.20 $13.20

B) $13.20 $11.75

C) $11.75 $11.75

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For both the American and European call, the minimum value is the greater of zero or [S − X / (1 + RFR)T-t] , where S = the price of the underlying stock, X = the exercise price of the option, RFR = the risk-free rate, and (T-t) = time to expiration in years.
62 − (50 / 1.050.5) = $13.21

hinsafdar

A put option with an exercise price of 59 on a non-dividend-paying stock expires in 3 months. The underlying stock is trading at 53 and the risk-free rate is 5%. The minimum value of an American-style put and of a European-style put are closest to:

American put

European put

A) $5.28 $6.00

B) $6.00 $6.00

C) $6.00 $5.28

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The American put can be exercised immediately for a payoff of $6.00. The European put cannot be exercised until expiration, so its minimum value is 59 / (1.05)0.25 − 53 = $5.28. (Because the minimum value of an in-the-money European put is less than the minimum value of an otherwise identical American put, you can select the correct answer without performing this calculation.)