Call Option
8.3.)An investor sells a European call option with strike price of K and maturity T and buys a put with the same strike price and maturity. Describe the investor's position.
The payoff to the investor is
- max (ST - K , 0) + max(K - ST, 0)
This is K- ST in all circumstances. The investor's position is the same as a short position in a forward contract with delivery price K.
8 .4.)Explain why brokers require margins when clients write options but not when they buy options? When an investor buys an option, cash must be paid up front. There is no possibility of future liabilities and therefore no need for a margin account.. When an investor sells an option, there are potential future liabilities. To protect against the risk of a default, margins are required.
8.5.)A stock option is on a February, May, August, and November cycle. What options trade on (a) April 1 and (b)May 30?
On April 1 options trade with expiration months of April, May, August, and November. On May 30 options trade with expiration months of June, July, August, and November.
8.6.)A company declares a 2-for-l stock split. Explain how the terms change for a call option with a strike price of $60.
The strike price is reduced to $30, and the option gives the holder the right to purchase twice as many shares.
8.7.)“Employee stock options issued by a company are different from regular exchange traded call options on the company's stock because they can affect the capital structure of the company." Explain this statement.
The exercise of employee stock options usually leads to new shares being issued by the company and sold to the employee. This changes the amount of equity in the capital structure. When a regular exchange-traded option is exercised no new shares are issued and the company's capital structure is not affected.
8.8.)A corporate treasurer is designing a hedging program involving foreign currency options. What are the pros and cons of using (a) the Philadelphia Stock
The payoff to the investor is
- max (ST - K , 0) + max(K - ST, 0)
This is K- ST in all circumstances. The investor's position is the same as a short position in a forward contract with delivery price K.
8 .4.)Explain why brokers require margins when clients write options but not when they buy options? When an investor buys an option, cash must be paid up front. There is no possibility of future liabilities and therefore no need for a margin account.. When an investor sells an option, there are potential future liabilities. To protect against the risk of a default, margins are required.
8.5.)A stock option is on a February, May, August, and November cycle. What options trade on (a) April 1 and (b)May 30?
On April 1 options trade with expiration months of April, May, August, and November. On May 30 options trade with expiration months of June, July, August, and November.
8.6.)A company declares a 2-for-l stock split. Explain how the terms change for a call option with a strike price of $60.
The strike price is reduced to $30, and the option gives the holder the right to purchase twice as many shares.
8.7.)“Employee stock options issued by a company are different from regular exchange traded call options on the company's stock because they can affect the capital structure of the company." Explain this statement.
The exercise of employee stock options usually leads to new shares being issued by the company and sold to the employee. This changes the amount of equity in the capital structure. When a regular exchange-traded option is exercised no new shares are issued and the company's capital structure is not affected.
8.8.)A corporate treasurer is designing a hedging program involving foreign currency options. What are the pros and cons of using (a) the Philadelphia Stock