Question

For a European call option and a European put option on the same stock, with the...

For a European call option and a European put option on the same stock, with the same strike price and time to maturity, which of the following is true?

A) When the call option is in-the-money and the put option is out-of-the-money, the stock price must be lower than the strike price.

B) The buyer of the call option receives the same premium as the writer of the put option.

C) Since both the call and the put are risky assets, the risk-free interest rate cannot affect the premiums of call or put.

D) If you have a portfolio of protected put, you can replicate that portfolio by long a call and hold certain amount of risk-free bond. E) Before expiration, only in-the-money options can have positive time premium.

Homework Answers

Answer #1

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A. Since the stock price is lower than the strike price, the call is out of money & Put is in the Money. - FALSE.
B. They are different premiums- FALSE.
C. Risk-free interest rate is taken into consideration while calculating the premium of the options - like in black Scholes option pricing model & Binomial model.- FALSE.
D. Long Protected Put = Short Call, Short Risk-free bond, Long Stock. - FALSE.

E. At expiration, time is in favor of the in the money options- Do theta (time premium) is positive. - TRUE.

Answer: E.

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