QUESTION $7$:

Circle or highlight the correct answer.

The following table describes the TIME VALUES of EUROPEAN PUT options on the S&P $500$ index. The EUROPEAN PUT options expire $2$ weeks from today. The S&P $500$ index value is $$4275.$ The index will not pay dividends over the life of these options.

Exercise price $|$ Time Value of Put Option $($Dollars per share$)$

$4275|80$

$4285|70$

$1.$ CIRCLE TWO REASONS WHY THE PUT OPTION WITH THE HIGHER EXERCISE PRICE HAS A LOWER TIME VALUE.

a$)$ The value of the insurance against the possibility that the option will expire worthless is lower.

b$)$ The interest lost from not being able to exercise the European option before its expiration day is higher.

c$)$ Because the index will not pay any dividends, its value must increase by a greater percentage to compensate its holders. A higher the index value is associated with lower put prices.

d$)$ The put option with the higher exercise price is$-$in the$-$money. However, because the index will not pay dividends, you will never exercise an in$-$the$-$money American put option before its expiration and its time value must be lower. In addition, when the index does not pay dividends, European and American put option are identical and they have the same time values. Therefore, the time value of the in$-$the money European put option must also be lower.