1A. What is the lowest possible value of a European put? a. Max(0, X-S 0 ) b. X(
ID: 2733938 • Letter: 1
Question
1A. What is the lowest possible value of a European put?
a. Max(0, X-S0) b. X(1+r)-T c. Max[0, S0-X(1+r)-T]
d. Max[0, X(1+r)-T-S0)] e. none of the above
1B. Which of the following is the lowest possible value of an America call on a stock with no dividends?
a. Max[0, S0-X(1+r)-T] b. S0 c. Max(0, S0-X) d. Max[0, S0(1+r)-T-X)]
e. none of the above
1C. 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 call’s price if the stock goes up?
a. 3.60 b. 8.00 c. 5.71 d. 4.39 e. none of the above
1D. If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be
a. higher than 0.28 b. lower than 0.28 c. 0.28 d. lower than the risk-free rate
e. none of the above
1E. The Black-Scholes-Merton model for European puts, obtained by applying put-call parity to the Black-Scholes-Merton model for European calls, is customarily expressed by which of the following:
a. P=Xe-rcTN(-d2)-S0N(-d1) b. P=X(1+r)-TN(-d2)-S0N(-d1) c. P=X(1+r)-TN(-d1)-S0N(-d2)
d. P=Xe-rcTN(-d1)-S0N(-d2) e. none of the above
Explanation / Answer
1a)Option D
The european put option is one which is used when we are confident that stock price will decrease going forward. It is given by max of (0,execrcie price-undelying price)
1b)Option A.
It is given by max(0, undelying price-execrcie price)
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