Financial Accounting > QUESTIONS & ANSWERS > University of Illinois, Chicago - FIN 494exam prepared(5) (All)

University of Illinois, Chicago - FIN 494exam prepared(5)

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1. Which of the following statements is true? If interest rate is positive and the stock pays no dividends then it is better to keep an American call option alive than to exercise it even if it is f... ar in the money It never makes sense to exercise an American put option early If a European option is priced below its lower bound, then the arbitrage includes borrowing at the risk-free rate Put-call parity holds for American options, just like it does for European options 10 points Question 2 1. You write a call option on Google. The current price of one share of Google is $400, the option strike price is $410, and the option premium is $5 (all prices are per share). On the expiration day, the price of Google is $425. The following statement is true: S0=400 X=410 ST=425 C=5 Write= -(St-X) -(425-410)= -15 The call is in the money Your payoff is negative Your payoff is positive and equal to 10 A and B A and C 10 points Question 3 1. Given the following data as of the close of trading on 10/26/18: Quest Diagnostics (DGX): 91.47 Options on DGX: American, expire January 18, 2019 c X p 23.7 70 105 14.2 Which of the options in the table above is priced above its lower bound? Neither option The call The put Both options 10 points We can see that all the options are above their lower bound. Part (b) : Now if the 80 strike option is going at 11 and as per our calculations, the lower bound should be 11.88 - hence we can profit from arbitrage as below:  We purchase the option for 11 and if we exercise it immediately, we would receive = 91.47 - 80 = 11.47  Since we purchased the option for 11, there is a risk free profit of 0.47 which is the arbtrage profit [Show More]

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