According to Black-Scholes option valuation and putcall parity, what will happen to the value of a put
Question:
Step by Step Answer:
Putcall parity links stocks bonds and put and call options A cha...View the full answer
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Accounting questions
-
The probability that production will increase if interest rates decline more than 0.5 percentage point for a given period is 0.72. The probability that interest rates will decline by more than 0.5...
-
What is the value of a common stock if a). the firm's earnings and dividends are growing annually at 20 percent, the current dividend is $2.64, and investors require a 15 percent return on...
-
Explain the factors used in the Black Scholes option valuation model. What is the relationship between each factor and the value of the option?
-
Refer to E 29 and respond to the following requirements. Data in E 2-9 Prepare the necessary adjusting entries on December 31, 2024, for the Microchip Company for each of the following situations....
-
What guidance would the auditor rely upon when reporting on compliance with aspects of contractual agreements or regulatory requirements in connection with audited financial statements? What level of...
-
Summarize the effect of operating leverage on EBIT.
-
In Thomas Friedmans book The World is Flat, he states the big companies should learn how to act small and enable their customers to act really big. What do you think that means? How might that...
-
Reporting Inventory at Lower of Cost or Market Parson Company was formed on January 1, 2012, and is preparing the annual financial statements dated December 31, 2012. Ending inventory information...
-
Exercise 5A: Produce or buy an item The company BB Inc. manufactures part X for its annual production. The following table presents information on production costs at a certain level. Production...
-
Multi Enterprises Ltd. is a Canadian-controlled private corporation whose fiscal period coincides with the calendar year. For the year 2020, the company's taxable income was calculated as follows:...
-
What, according to the Black-Scholes option valuation model, is the relationship between the value of a call option and each of the following? a) Risk as measured by the variability of the underlying...
-
How may the Black-Scholes option valuation model be used to determine the risk associated with the underlying stock?
-
Solve the system by the method of substitution. 1. 2. Sx - y = 0 (2x + y = 0 2 Sx - 2y = 0 13 ? %3D 0 %3D ||
-
An auditor is interested in the mean value of a companys accounts receivable. He randomly samples 200 accounts receivable and finds that the mean accounts receivable is $231. From past experience, he...
-
Suppose that the quality control engineer in question 35 does not know what the standard deviation is and that this time, he selects a random sample of only 25 light bulbs. Does your answer to...
-
Use the information given in question 38 to test the hypothesis that the population mean accounts receivable is greater than $200 at the .05 level of significance. Question 38 An auditor is...
-
An investment advisor is interested in determining whether a retirement community represents a potential clientele base. Of the 2,000 residents, he randomly samples 100 individuals and finds their...
-
Write pros and cons of Heap-Sort, Merge-Sort and Quick-Sort.
-
A(n) __________is a meaningful group of stimuli that can be stored together in short-term memory.
-
San Carlos Bank and Trust Company uses a credit-scoring system to evaluate most consumer loans that amount to more than $2,500. The key factors used in its scoring system are found at the conclusion...
-
What is multimedia?
-
How do changes in inflation expectations impact interest rates?
-
Can the nominal interest rate available to an investor be negative? Can the real interest rate be negative?
-
Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed rate period has just expired. The loan was originally for $300,000 with 360 payments at 4.2% APR, compounded...
-
In Unix and Linux systems, the configuration of the operating system, servers, applications and preferences is commonly stored in plain text files. You want to view the hardware attached to the...
-
An actual corporation reported this information on their 2019 Annual Report ($ millions). Inventory cost method of LIFO is used. Date Inventory Balance Cost of Goods Sold (COGS) December 31, 2018...
-
The markets in general are paying a 2% real rate of return. Inflation is expected to be 3%. ABC stock commands a 6% risk premium. What is the expected rate of return on ABC stock? The required rate...
Study smarter with the SolutionInn App