Imagine that an investor in the common stock of a company has two choices, either to (1) but 100 shares of a company’s common stock at $10 per share or (2) to purchase a call for $125 to purchase 100 shares at the same $10 price at the end of nine months. If the investor chooses to buy the stock, the investor must pay $1,000 immediately and is at risk for the entire $1,000 investment. If the investor chooses to purchase the call option, the investor will pay only $125 immediately and can wait until the option’s expiration date to decide whether or not to buy the stock for an additional $1,000. The investor’s risk is limited to $125. If the option is___________, the option will be exercised. If it is___________, the option will simply lapse.
Answer(s): A
Which of the following is NOT out of the call option’s value?
Answer(s): B
Options can be very complicated. For example, some options have strike pries that vary over time or under different market conditions. Other options have lives that vary depending on stock prices and market conditions. There are even___________, which are options on option, and ___________, which set price boundaries.
Answer(s): C
The Black-Scholes model assumes near perfect markets for both the options and the underlying stock. Among other conditions, the model assumes the following EXCEPT:
Answer(s): D
A seller who does not own a security (a short seller) will simply accept price of the security from the buyer and agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date. While this short sale is outstanding, the short seller will have the use, of, or interest on, the proceeds of the sale. This is the assumption of:
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