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Options, Futures, and Other Derivatives

John C. Hull

Chapter 9

Properties of Stock Options - all with Video Answers

Educators


Chapter Questions

01:10

Problem 1

List the six factors that affect stock option prices.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:17

Problem 2

What is a lower bound for the price of a 4-month call option on a non-dividend-paying stock-when the stock price is $\$ 28$, the strike price is $\$ 25,$ and the risk-free interest rate is $8 \%$ per annum?

Akash M
Akash M
Numerade Educator
02:17

Problem 3

What is a lower bound for the price of a 1 -month European put option on a nondividend-paying stock when the stock price is $\$ 12$, the strike price is $\$ 15,$ and the risk-free interest rate is $6 \%$ per annum?

Akash M
Akash M
Numerade Educator
05:08

Problem 4

Give two reasons why the early exercise of an American call option on a non-dividendpaying stock is not optimal. The first reason should involve the time value of money. The second should apply even if interest rates are zero.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
06:28

Problem 5

"The early exercise of an American put is a trade-off between the time value of money and the insurance value of a put." Explain this statement.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
00:49

Problem 6

Explain why an American call option on a dividend-paying stock is always worth at least as much as its intrinsic value. Is the same true of a European call option? Explain your answer.

Zach Steedman
Zach Steedman
Numerade Educator
02:17

Problem 7

The price of a non-dividend-paying stock is $\$ 19$ and the price of a 3 -month European call option on the stock with a strike price of $\$ 20$ is $\$ 1 .$ The risk-free rate is $4 \%$ per annum. What is the price of a 3 -month European put option with a strike price of $\$ 20 ?$

Akash M
Akash M
Numerade Educator
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Problem 8

Explain why the arguments leading to put-call parity for European options cannot be used to give a similar result for American options.

Rashmi Sinha
Rashmi Sinha
Numerade Educator
02:17

Problem 9

What is a lower bound for the price of a 6 -month call option on a non-dividend-paying stock when the stock price is $\$ 80,$ the strike price is $\$ 75,$ and the risk-free interest rate is $10 \%$ per annum?

Akash M
Akash M
Numerade Educator
02:17

Problem 10

What is a lower bound for the price of a 2 -month European put option on a nondividend-paying stock when the stock price is $\$ 58,$ the strike price is $\$ 65,$ and the risk-free interest rate is $5 \%$ per annum?

Akash M
Akash M
Numerade Educator
02:10

Problem 11

A 4 month European call option on a dividend-paying stock is currently selling for $\$ 5$ The stock price is $\$ 64$, the strike price is $\$ 60$, and a dividend of $\$ 0.80$ is expected in 1 month. The risk-free interest rate is $12 \%$ per annum for all maturities. What opportunities are there for an arbitrageur?

Anand Jangid
Anand Jangid
Numerade Educator
02:10

Problem 12

A I-month European put option on a non-dividend-paying stock is currently selling for $\$ 2.50 .$ The stock price is $\$ 47,$ the strike price is $\$ 50,$ and the risk-free interest rate is $6 \%$ per annum. What opportunities are there for an arbitrageur?

Anand Jangid
Anand Jangid
Numerade Educator
01:03

Problem 13

Give an intuitive explanation of why the early exercise of an American put becomes more attractive as the risk-free rate increases and volatility decreases.

Shazia Naz
Shazia Naz
Numerade Educator
02:17

Problem 14

The price of a European call that expires in 6 months and has a strike price of $\$ 30$ is $\$ 2$ The underlying stock price is $\$ 29,$ and a dividend of $\$ 0.50$ is expected in 2 months and again in 5 months. The term structure is flat, with all risk-free interest rates being $10 \%$ What is the price of a European put option that expires in 6 months and has a strike price of $\$ 30 ?$

Akash M
Akash M
Numerade Educator
00:37

Problem 15

Explain carefully the arbitrage opportunities in Problem 9.14 if the European put price is $\$ 3$

Ashley Volpe
Ashley Volpe
Numerade Educator
02:17

Problem 16

The price of an American call on a non-dividend-paying stock is $\$ 4 .$ The stock price is $\$ 31,$ the strike price is $\$ 30,$ and the expiration date is in 3 months. The risk-free interest rate is $8 \%$. Derive upper and lower bounds for the price of an American put on the same stock with the same strike price and expiration date.

Akash M
Akash M
Numerade Educator
01:18

Problem 17

Explain carefully the arbitrage opportunities in Problem 9.16 if the American put price is greater than the calculated upper bound.

Srikar Katta
Srikar Katta
Numerade Educator
02:22

Problem 18

Prove the result in equation $(9.4) .$ (Hint: For the first part of the relationship, consider
(a) a portfolio consisting of a European call plus an amount of cash equal to $K$ and (b) a portfolio consisting of an American put option plus one share.)

Aman Gupta
Aman Gupta
Numerade Educator
03:13

Problem 19

Prove the result in equation $(9.8) .$ (Hint: For the first part of the relationship, consider
(a) a portfolio consisting of a European call plus an amount of cash equal to $D+K$ and (b) a portfolio consisting of an American put option plus one share.)

Jay Patel
Jay Patel
Numerade Educator
00:49

Problem 20

Regular call options on non-dividend-paying stocks should not be exercised early. However, there is a tendency for executive stock options to be exercised early even when the company pays no dividends (see Business Snapshot 8.3 for a discussion of executive stock options). Give a possible reason for this.

Zach Steedman
Zach Steedman
Numerade Educator
01:03

Problem 21

Use the software DerivaGem to verify that Figures 9.1 and 9.2 are correct.

Rylie Howey
Rylie Howey
Numerade Educator
09:55

Problem 22

A European call option and put option on a stock both have a strike price of $\$ 20$ and an expiration date in 3 months. Both sell for $\$ 3$. The risk-free interest rate is $10 \%$ per annum, the current stock price is $\$ 19,$ and a $\$ 1$ dividend is expected in 1 month. Identify the arbitrage opportunity open to a trader.

Arulmozhi T
Arulmozhi T
Numerade Educator
10:33

Problem 23

Suppose that $c_{1}, c_{2},$ and $c_{3}$ are the prices of European call options with strike prices $K_{1}$ $K_{2},$ and $K_{3},$ respectively, where $K_{3} > K_{2} > K_{\mathrm{L}}$ and $K_{3}-K_{2}=K_{2}-K_{1} .$ All options have the same maturity. Show that
$$c_{2} \leqslant 0.5\left(c_{1}+c_{3}\right)$$
(Hint: Consider a portfolio that is long one option with strike price $K_{1}$, long one option with strike price $K_{3}$, and short two options with strike price $K_{2}$.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
00:27

Problem 24

What is the result corresponding to that in Problem 9.23 for European put options?

Chai Santi
Chai Santi
Numerade Educator
03:52

Problem 25

Suppose that you are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 year. If at that time the value of the company is greater than the face value of the debt, you will pay off the debt. If the value of the company is less than the face value of the debt, you will declare bankruptcy and the debt holders will own the company.
(a) Express your position as an option on the value of the company.
(b) Express the position of the debt holders in terms of options on the value of the company.
(c) What can you do to increase the value of your position?

Joshua Eastwood
Joshua Eastwood
Numerade Educator
10:33

Problem 26

Consider an option on a stock when the stock price is $\$ 41$, the strike price is $\$ 40$, the riskfree rate is $6 \%$, the volatility is $35 \%$, and the time to maturity is 1 year. Assume that a dividend of $\$ 0.50$ is expected after 6 months.
(a) Use DerivaGem to value the option assuming it is a European call.
(b) Use DerivaGem to value the option assuming it is a European put.
(c) Verify that put-call parity holds.
(d) Explore using DerivaGem what happens to the price of the options as the time to maturity becomes very large. For this purpose, assume there are no dividends. Explain the results you get.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator