Hedging in the futures market
A. eliminates the opportunity for gains.
B. eliminates the opportunity for losses.
C. increases the earnings potential of the portfolio.
D. does all of the above.
E. does both A and B of the above.
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Which of the following is not a factor in pricing a call option in the binomial model?
A. The risk- free rate
B. The exercise price
C. The probability that the underlying will go up
Which of the following best describes the binomial option pricing formula?
A. The expected payoff is discounted at the risk- free rate plus a risk premium.
B. The spot price is compounded at the risk- free rate minus the volatility premium.
C. The expected payoff based on risk- neutral probabilities is discounted at the risk-free rate.
You again observe a €100 price for a non- dividend- paying stock with the same inputs as the previous box. That is, the call option has one year to mature, the periodically compounded risk- free interest rate is 5.15%, the exercise price is €100, u = 1.35, and d = 0.74. The put option value will be closest to:
A. €12.00.
B. €12.10.
C. €12.20.
The most correct statement about the binomial option pricing formula is that:
A. The discount rate to calculate the option price is the risk-free rate
B. The discount rate to calculate the option price is the risk-free rate plus a risk premium
C. The spot price is compounded at the risk-free rate to get the expected payoff
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