Q5I

Expert-verifiedFound in: Page 552

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 6%. Assume the stocks on which these options are written pay no dividends.**

**a. Which put option is written on the stock with the lower price?**

**(1) A**

**(2) B**

**(3) Not enough information**

**b. Which put option must be written on the stock with the lower price?**

**(1) A**

**(2) B**

**(3) Not enough information**

**c. Which call option must have the lower time to expiration?**

**(1) A**

**(2) B**

**(3) Not enough information**

**d. Which call option is written on the stock with higher volatility?**

**(1) A**

**(2) B**

**(3) Not enough information**

**e. Which call option is written on the stock with higher volatility?**

**(1) A**

**(2) B**

**(3) Not enough information**

a. (1)

b. (2)

c. (2)

d. (2)

e. (3)

If put A is not written on the lower priced stock, it would sell; for less than Put A because of lower volatility of stock A. Therefore the correct option is option (1).

Write put on the stock B with lower price for higher value. Therefore the correct option is option (2).

Since call B has a lower time to maturity, therefore it is cheaper than call A. Therefore the correct option is option (2).

Since call B has a higher price, the correct option is option (2).

Since the values given are consistent with either stock having high volatility, the question doesn’t have appropriate information. Therefore the correct option is option (3).

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