Question

Consider call and put options. Assume that the price of an underlying asset evolves without drift and with a given volatility. Compare and contrast the response of the price of the call and put options to a decrease in the volatility of the underlying asset. Provide diagrams to support your answer.

Answer #1

Changes in volatility is directly related to the prices of both the call option and put option.

when there is a positive change in the volatility, the prices of both the call option and put option will go on increasing.

When there is a negative change in the volatility,the prices of both the call option and put option will come down because there would be lesser chances of higher fluctuations to achieve the desired output and it will be less Preferred by the traders.

hence, it can be said that volatility is directly related to the prices of the call and put option and the change in volatility is always a reason for change in pricing of various calls and puts.

If the volatility of the underlying asset increases, then
the:
Value of the put option will increase, but the value of the call
option will decrease.
Value of the put option will decrease, but the value of the call
option will increase.
Value of both the put and call options will increase.
Value of both the put and call options will decrease.
Value of both the put and call options will remain the same.

Consider a put and a call, both on the same underlying stock
that has present price of $34. Both options have
the same identical strike price of $32 and
time-to-expiration of 200 days. Assume that there
are no dividends expected for the coming year on the stock, the
options are all European, and the interest rate is
10%. If the put premium is $7.00
and the call premium is $12.00, which portfolio
would yield arbitrage profits? Hint: Check your answer...

To maximize profit, the writer (seller) of a call option wants
the price of the underlying asset (S) to __________ and the holder
(buyer) of a put option wants the price of the underlying asset (S)
to __________.
Question 5 options:
decrease, decrease
decrease, increase
increase, decrease
increase, increase

You buy a put option with strike price of $40 and simultaneously
buy two call options with the same strike price, $40. Currently,
the market value of the underlying asset is $39. The put option
premium is $2.50 and a call option sells for $3.25. Assume that the
contract is for 1 unit of the underlying asset. Assume the interest
rate is 0%. Draw a diagram depicting the net payoff (profit
diagram) of your position at expiration as a function...

Which of the following best describes call options?
A
A commitment to buy the underlying asset for a specific
price.
B
The right but not the obligation to buy the underlying asset for
a specific price.
C
The right but not the obligation to sell the underlying asset
for a specific price.
D
A commitment to sell the underlying asset for a specific
price.

Current stock price of underlying asset = $80
Standard deviation of returns of underlying asset = 30%
Strike price of call option = $85
Time to expiry of call option = 6 months
Price of call option = $5.53
Risk-free rate = 5%
The price of a corresponding put option is closest
to
Group of answer choices
A) $3.3
B) $6.1
C) $8.4
D) $9.9
Current stock price of underlying asset = $80
Standard deviation of returns of underlying asset...

What type of options are standardised with respect to the
underlying asset, the size of the contract and the maturity
date?
Select one:
a. Call Options
b. Over-The-Counter Options
c. Put Options
d. Exchange Traded Options
Which of the following features of an option is the only thing
that can change over the life of the option?
Select one:
a. The exercise price.
b. The time to maturity.
c. The underlying asset of the option.
d. Who the writer of...

A call option with exercise price of $120 is priced at $3, the
underlying security price is $125. At the same time, a put option
for the same underlying security with the same exercise price and
maturity, is price at $3. Assume both options are of American
style. Which of the following most likely to be correct?A.Both
options are overpriced. B. The call option is underpriced. C. The
put option is overpriced.D. Both options are underpriced. E. None
of the...

Q4. A trader longs a European call and shorts a European put
option. The options have the same underlying asset, strike price
and maturity. Please depict the trader’s position. Under what
conditions is the value of position equal to zero? (Hint: compare
the payoff pattern of the option position with that of a forward
contract.)

1:Consider a European call option on a stock with current price
$100 and volatility 25%. The stock pays a $1 dividend in 1 month.
Assume that the strike price is $100 and the time to expiration is
3 months. The risk free rate is 5%. Calculate the price of the the
call option.
2: Consider a European call option with strike price 100, time
to expiration of 3 months. Assume the risk free rate is 5%
compounded continuously. If the...

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