Questions from Business Statistics

Q: Suppose you observe options on Apple, Inc. stock trading such

Suppose you observe options on Apple, Inc. stock trading such that the following condition is observed: S0 Pa S0,T,X Ca S0,T,X X 1 r T Explain how an arbitrageur would seek to capitalize on this obs...

Q: Consider a call option on the U.S. dollar written

Consider a call option on the U.S. dollar written in Indian rupees (). The current spot exchange rate is 70/$, the Indian interest rate is 7 percent, and the U.S. interest rate is 5 percent (both annu...

Q: Why does a market participant not earn a risk premium on a

Why does a market participant not earn a risk premium on a carry arbitrage transaction?

Q: Put–call parity is a powerful formula that can be used

Put–call parity is a powerful formula that can be used to create equivalent combinations of options, risk-free bonds, and stock. Suppose there are options available on the number of points LeBron Jame...

Q: (Concept Question) Suppose Congress decides that investors should not profit

(Concept Question) Suppose Congress decides that investors should not profit when stock prices go down, so it outlaws short selling. Congress has not figured out options, however, so there are no rest...

Q: Suppose you observe a European call option that is priced at less

Suppose you observe a European call option that is priced at less than the value Max [0, S0 − X (1 r) −T]. What type of transaction should you execute to achieve the maximum benefit? Demonstrate that...

Q: Explain why an option’s time value is greatest when the stock price

Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of-the-money.

Q: Critique the following statement made by an options investor: “My

Critique the following statement made by an options investor: “My call option is very deepen-the-money. I don’t see how it can go any higher. I think I should exercise it.

Q: Call prices are directly related to the stock’s volatility, yet higher

Call prices are directly related to the stock’s volatility, yet higher volatility means that the stock price can go lower. How would you resolve this apparent paradox?

Q: Construct a calendar spread using the August and October 170 calls that

Construct a calendar spread using the August and October 170 calls that will profit from high volatility. Close the position on August 1. Use the spreadsheet to find the profits for the possible stock...