Why do higher interest rates lead to higher call option prices but lower put option prices?
Question:
Step by Step Answer:
When buying a call option one hopes to exercise it at a later date Thus th...View the full answer
Introduction To Derivatives And Risk Management
ISBN: 9781305104969
10th Edition
Authors: Don M. Chance, Robert Brooks
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 Finance questions
-
It seems that each time the Fed raises interest rates, the stock market has an awful few days. Why do higher interest rates have such an impact on the stock market?
-
True or False: 1. The Wagner Act protected the rights of workers to organize and bargain collectively. 2. Economic rent arises when a factor of production has a perfectly inelastic supply curve. 3....
-
1. Which of the following statements concerning bonds is incorrect? a. They involve blended payments of principal and interest. b. They have a fixed maturity date, at which time the issuer repays the...
-
What is the asset-liability time mismatch that all banks face?
-
What is the forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in twoyears)? Maturity (years) Zero-coupon YTM 4 5.0% 4.0% 5.5% 5.5% 4.5%
-
A train engine is pulling four boxcars, each of inertia \(m\). The engine can exert a force of magnitude \(F\) on what it is pulling. Assuming that friction can be ignored, what is the tension in...
-
Explain from where a corporation derives its authority.
-
Sam Jones has two years of historical sales data for his company. He is applying for a business loan and must supply his projections of sales by month for the next two years to the bank. a. Using the...
-
On January 1, JKR Shop had $550,000 of beginning inventory at cost. In the first quarter of the year, it purchased $1,690,000 of merchandise, returned $24,100, and paid freight charges of $38,600 on...
-
You have been asked to prepare the financial statements for Computer Solutions for the year ended December 31, 2021. The following additional facts are collected for use in making adjusting entries...
-
The value Max [0, X (l + r)"T - S0] was shown to be the lowest possible value of a European put. Why is this value irrelevant for an American put?
-
Suppose a European put price exceeds the value predicted by put-call parity. How could an investor profit? Demonstrate that your strategy is correct by constructing a payoff table showing the...
-
x = 35, n = 50, 99% level. We have given the number of successes and the sample size for a simple random sample from a population. In each case, do the following tasks. a. Determine the sample...
-
What are some torts that would also affect family law proceedings. For example could someone claim unjust enrichment as an affirmative defense in a family law proceeding?
-
Read the case of Sepheri v Scanlan 1991 (4) SA 587, analyse it and state its relevance to family law. Your Analysis should indicate your understanding of family law ?
-
Who are the traditional providers of payment services in the world?
-
what does it mean when they say "Family law agreements are binding if there is a lack of consideration, formality of signatures or witnesses, or non-involvement of a family law dispute resolution...
-
Family law attorneys receive about 1/4 of all bar grievances. Why do you think that is? What should a family law paralegal do maintain good client relationships? What skills and strengths will you...
-
Go to one of the Web sites that contain video clips (such as www.youtube.com) and view some video clips about how savings grow. You can use search phrases such as future value of savings. Select one...
-
On average there are four traffic accidents in a city during one hour of rush-hour traffic. Use the Poisson distribution to calculate the probability that in one such hour there arc (a) No accidents...
-
Explain how a marketing managers sales forecast for a new marketing plan might be used by a. A financial manager; b. An accountant; c. A production manager; d. A human resources manager.
-
Explain the difference between natural accounts and functional accounts.
-
Could the approaches to cost allocation that we discussed in this chapter apply to a firm, like a travel agency, that produces only services? Explain your thinking.
-
Company name is Walmart, Inc. here is the link https://www.sec.gov/ix?doc=/Archives/edgar/data/104169/000010416923000020/wmt-20230131.htm Overview 1. The financial statements for your company are...
-
Congress would like to increase tax revenues by 19 percent. Assume that the average taxpayer in the United States earns $54,000 and pays an average tax rate of 15 percent. Required: a. If the income...
-
Best Solutions is a retail merchandiser selling computer equipment. Best uses the gross method of accounting for inventory purchases and sales, a perpetual inventory system with LIFO inventory...
Study smarter with the SolutionInn App