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Reading 71: Option Markets and Contracts-LOS n 习题精选

Session 17: Derivatives
Reading 71: Option Markets and Contracts

LOS n: Contrast American options with European options in terms of the lower bounds on option prices and the possibility of early exercise.

 

 

The value of an American option can equal that of a European option with the same maturity, exercise price, and underlying stock when:

A)
the owner of the American option chooses to exercise the option before maturity.
B)
the owner of the American option holds the option until maturity.
C)
the seller of the American option does not allow the holder to exercise before maturity.


 

If two options are identical (maturity, underlying stock, strike price, etc.) in all ways, except one is a European option and the other is an American option, the value of the American option will equal or exceed the value of the European option. Why? The American option has more flexibility than the European option, so it should be worth more. If you choose not to exercise the American option, it will be equal to the European option and have the same value. 

The other statements are false. Exercise is at the option of the holder, not the writer.

Which of the following is least likely a valid reason to trade options?

A)
Exchange-traded options can be modified to exactly match the desired exposure to the underlying.
B)
Options can be combined with stocks to perform like risk-free bonds.
C)
Option prices are more volatile than the underlying stock price.


Exchange-traded options are standardized to promote market liquidity. Since the contract terms cannot be modified, the exposure may or may not exactly match what is desired.

TOP

There are two different options available with ITM Corporation common stock as the underlying asset. They each have the same maturity date, a strike price of $40.00, and are identical in all other ways except, one is a European call, and the other is an American call. ITM stock has a market value of $43.75. The American call option is selling for $4.90. For the European call, which of the following option premiums is most likely?

A)
$4.25.
B)
$4.90.
C)
$5.25.


Both the American and European calls have a strike price of $40.00. Each call is therefore in-the-money by $3.75 ($43.75 - $40.00). Since they are identical in all ways except when they can be exercised, and since European calls are less flexible than American, their market value, option premium, will most likely be lower. The lower option premium will allow for a higher return on the European option relative to the American, assuming both are held to expiration. This higher return is compensation for the reduced flexibility of the option terms.

TOP

American options are worth no less than European options with the same maturity, exercise price, and underlying stock because:

A)
both of these choices are correct.
B)
purchasers of American options receive stock dividends, while purchasers of European options do not.
C)
American options can be exercised before maturity, while European options can be exercised only at maturity.


By definition.

TOP

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)
The greater flexibility allowed in exercising the American option will normally result in a higher market value relative to an otherwise identical European option.
B)
Because the American and European options have identical terms and are written against the same common stock, they will have identical option premiums.
C)
The European option will normally have a higher option premium because of their relative scarcity compared to American options.


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.

TOP

Which of the following statements about options is least accurate?

A)
If an American option is exercised at expiration, its value will be less than that of a European option.
B)
Option prices are generally higher the longer the time until the option expires.
C)
For put options, the higher the strike price relative to the stock's underlying price, the more the put is worth.


The American option cannot be worth less than the European option.

TOP

Which of the following statements about the early exercise of an option is least accurate? For an American:

A)
put option on an asset with no cash flows, early exercise is sometimes optimal.
B)
call option on an asset with positive cash flows, early exercise is sometimes profitable.
C)
call option, on an asset with no cash flows, early exercise can be profitable if the option is far in the money.


Early exercise of an American call option on an asset with no cash flows is never profitable, they are worth more ‘alive than dead’.

TOP

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

A)
will have the same lower bound on its price.
B)
will have a lower, lower bound on its price.
C)
will have a higher, lower bound on its price.


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, lower bound on the price of the American put option.

TOP

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

A)
will have a higher, lower bound on its price.
B)
will have the same lower bound on its price.
C)
will have a lower, lower bound on its price.


Since early exercise of an American call option on an asset with no cash flows never generates more than the minimum value of the European option, early exercise is never profitable and the lower bounds on prices of both types of options are the same.

TOP

thanks a lot

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