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need help with Finance Homework, step by step solution- Reference book Derivatives Markets by Robert L. Mc Donald, chapter 9, 10, 12;Attachments Preview;der5.pdf Download Attachment;MFE Financial Derivatives Homework 5 (Chapters 9 and 10);Multiple Choice;Identify the choice that best completes the statement or answers the question.;1 Which of the following would have the same value at t = 0 as an at-the-money call option on a forward contract;priced at FT (the forward price at time = 0)?;A) A put option on the forward at the same exercise price.;B) A put option, long the underlying asset, and short a risk-free bond that pays X-F T at;option expiration.;C) A put option, long the underlying asset, and short a risk-free bond that pays X at option;expiration.;D) A put option, short the underlying asset, and long a risk-free bond that pays X at option;expiration.;2 Referring to put-call parity, which one of the following alternatives would allow you to create a synthetic stock;position?;A) Sell a European call option, buy a European put option, short the present value of the;exercise price worth of a riskless pure-discount bond.;B) Buy a European call option, buy a European put option, invest the present value of the;exercise price in a riskless pure-discount bond.;C) Buy a European call option, short a European put option, invest the present value of the;exercise price in a riskless pure-discount bond.;D) Buy a European call option, buy a European put option, short the present value of the;exercise price in a riskless pure-discount bond.;3 Which of the following options will NOT be exercised early?;A) Put on a dividend paying stock;C) Put on a non-dividend paying stock;B) Call on a dividend paying stock;D) Call on a non-dividend paying stock;4 Which of the following statements regarding an option prior to expiration is most accurate? The maximum value of;a(n);A) European call is greater than the maximum value of an American call.;B) American put is equal to the maximum value of a European put.;C) American call is equal to the maximum value of a European call.;D) European put is greater than the maximum value of an American put.;5 Compared to European put options on an asset with no cash flows, an American put option;A) will have the same minimum value.;C) will have a lower minimum value.;B) will have a higher minimum value.;D) will have a lower maximum value.;6 A put option with an exercise price of 59 on a non-dividend-paying stock expires in 3 months. The underlying;stock is trading at 53 and the risk-free rate is 5%. The minimum value of an American-style put and of a;European-style put are closest to;A) American put $5.28;European put $6.00;B) American put $6.00;European put $6.00;C) American put $6.00;European put $5.28;D) American put $5.28;European put $5.28;7 Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is;5%. The lower bound for a call option with an exercise price of 50 is;A) $0.;C) $3.40.;B) $3.00.;D) $4.22.;1;8 The lower bound on European put option prices can be adjusted for cash flows of the underlying asset by;A) subtracting the present value of the expected dividend payments from the exercise price.;B) adding the present value of the expected dividend payments to the exercise price.;C) subtracting the present value of the expected dividend payments from the current asset;price.;D) adding the present value of the expected dividend payments from the current asset price.;9 A stock is priced at 40 and the periodic risk-free rate of interest is 8%. The value of a two-period European call;option with a strike price of 37 on a share of stock using a binomial model with an up factor of 1.20 and a down;factor of 0.833 is closest to;A) $9.13.;C) $3.57.;B) $9.25.;D) $6.82.;10 A stock is priced at 38 and the periodic risk-free rate of interest is 6%. What is the value of a two-period European;put option with a strike price of 35 on a share of stock using a binomial model with an up factor of 1.15 and a;down factor of 1/1.15, assuming a risk-neutral probability of 68%?;A) $0.64.;C) $0.57.;B) $2.58.;D) $1.90.;11 Regarding deep in-the-money options on forwards, it is;A) sometimes worthwhile to exercise calls early but not puts.;B) sometimes worthwhile to exercise both calls and puts early.;C) never worthwhile to exercise puts or calls early.;D) sometimes worthwhile to exercise puts early but not calls.;2;View Full Attachment;der6.pdf Download Attachment;MFE Financial Derivatives Homework 6 (Chapter 12);Multiple Choice;Identify the choice that best completes the statement or answers the question.;1 Which of the following is least likely one of the assumptions of the Black-Scholes-Merton option pricing;2;3;4;5;6;model?;A) There are no cash flows on the underlying asset.;B) Changes in volatility are known and predictable.;C) The risk-free rate of interest is known and does not change over the term of the;option.;D) The returns of the underlying asset follow a normal distribution.;The value of a put option will be higher if, all else equal, the;A) exercise price is lower.;B) underlying asset has less volatility.;C) underlying asset has positive cash flows.;D) risk-free interest rate is higher.;The price of a June call option with an exercise price of $50 falls by $0.50 when the underlying stock;price falls by $2.00. The delta of a June put option with an exercise price of $50 is closest to;A) 0.25.;C) 0.25.;B) 0.75.;D) 0.75.;Gamma is the greatest when an option;A) is at the money.;C) is deep out of the money.;B) is deep in the money.;D) is far from expiration.;If we use four of the inputs into the Black-Scholes-Merton option-pricing model and solve for the asset;price volatility that will make the model price equal to the market price of the option, we have found the;A) option volatility.;C) historical volatility.;B) implied volatility.;D) theoretical volatility.;Robert Walter is a recently retired executive from Cardinal Industries. Over the years he has accumulated;$10 million worth of Cardinal stock, which is currently traded at $50/share, and another $2 million in a;cash savings account. Walter would like to consider neutralizing his Cardinal equity position from;changes in the stock price of Cardinal. Using the information in the Table below, how many standard;Cardinal European options would have to be bought/sold in order to create a delta neutral portfolio?;Cardinal (at-the-money) Option Information;Premium;European call;European put;American call;American put;delta;$6.31;$4.83;$6.28;$4.96;0.5977;-0.4023;0.5973;-0.4258;A) Buy 497,141 put options.;B) Sell 497,141 put options.;C) Sell 119,540 call options.;D) Buy 370,300 call options.;1;Financial Derivatives HW6;7 Frank Inslee, a trader for Seattle Neutral, an option dealer, set up a delta hedged portfolio for a written;call position one day ago (on day 0). Some details about the delta hedged portfolio are given in the table;below. The option is a 60-day European call with a strike price at $45 on AMP, a financial stock, on;which Seattle Neutral has written 500 calls when its price was $42/share. The risk-free interest rate is;4%.;Days;1;2;Call Premium;Call Delta;0.89;1.31;0.38171;0.49180;AMP Closing;Price;43.50;44.50;Bond Balance;-3,263;?;Whats the dollar difference between the actual value of the delta hedged portfolio value before;adjustment for new delta value and its projected on Day 2?;A) -32.;C) -20.;B) 65.;D) 44.;8 In delta-hedging a call position, which of the following pairs of conditions would lead to the gamma;effect being the most important? The call is;A) at-the-money and near expiration.;B) at-the-money and has a long time until expiration.;C) out-of-the-money and near expiration.;D) deeply in the money.;9 Which of the following statements concerning vega is most accurate? Vega is greatest when an option is;A) at the money.;C) far out of the money.;B) far in the money.;D) closer to expiration.

 

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