Option, Finance, Practise

Chapter 6

Concept

1. explain the advantages and disadvantages to a call buyer of closing out a position prior to expiration rather than holding it all the way until expiration.

2. Suppose that one is considering buying a call at a particular exercise price. What reasons could be given for the alternative of buying a call at a higher exercise price? At a lower exercise price?

3. Explain how a protective put is like purchasing insurance on a stock.

4. Why is choosing an exercise price on a protective put like deciding which deductible to take on an insurance policy?

5. Discuss and compare the two bullish strategies of buying a call and writing a put. Why would one strategy be preferable to the other?

Questions

4.

Chapter 2

1. Determine whether each of the following arrangements behaves like an option. If so, decide whether it is a call or a put and identify the premium.

a. purchase homeowner’s insurance for your house.

b. You are a high school senior evaluating possible collage choices. One school promises that if you enroll, it will guarantee your tuition rate for the next four years.

c. You enter into a noncancelable, long-term apartment lease.

2. explain the difference between an American option and a European option. What do they have in common?

3. Contrast option class and option series. Who determines the options that will be publicly traded?

4. When an option exchange is trying to establish which exercise prices will be traded, what is the option exchange’s goal?

5. Market makers can use a variety of trading styles. Identify and discuss three trading styles.

Questions

1.2.

15. explain the major difference between the regulation of exchange-traded options and over-the-counter options.

2.a. Suppose ABC stock declared a 10% stock dividend. Option holders of ABC July 25's after adjustment would hold ABC July 22 3/4 covering 110 shares. Remember that premiums on options are quoted on a per...