Question

Question One: -

Crosswords Game:

Synonyms of these sentences :
a) A European option can be exercised only on the expiration date. Compare with an American option, which can be exercised before, up to, and on its expiration date.
b) An American option can be exercised before and up to its expiration date. Compare with a European option, which can be exercised only on the expiration date.
c) Price set for calling (buying) an asset or putting (selling) an asset.
d) The purchase price of an option.
e) refers to differing expiration date.
f) Out of the money describes an option where exercise would not be profitable.
g) Use of a firm’s call option on a callable convertible bond when the firm knows that bondholders will exercise their option to convert.
h) An equation representing the proper relation between put and call prices. Violation of parity allows arbitrage opportunities.
i) Creating and designing securities with custom-tailored characteristics.
j) A bond with no option features such as callability or convertibility.

Answer 1

a) With Europeon-style option contracts, the holder may only exercise on the expiration date, making early exercise impossible. Early exercise is only possible with American-style option contracts, which the holder may exercise at any time up to expiration.

b)Early exercise is only possible with American-style option contracts, which the holder may exercise at any time up to expiration. With Europeon-style option contracts, the holder may only exercise on the expiration date, making early exercise impossible.

c) Investors, oftenly buying the calls when they are bullish on the stocks, and also call options help reduce the maximum loss of investment. Price set up is based on the some criterias, ie, purchase price of the item and related taxes, manufacturing costs, import duties etc...

d)Usually Options represents 100 shares of the underlying security, buyer will pay a prepium fee for each contract.

e)Incase of Options, after expiration date, Options are no longer active.

f) An option has no intrinsic value, only extrinsic value.

g) The conversion price frequently increases overtime.

h) Call price should not be under the maximum of 0.

put-call parity has given below,

C+PV(x)=P+S

where

C= price of the Europeon call options

PV(x)= the present value of the strike price(x), discounted from the value on the expiration date at the risk free rate.

P= Price of the Europeon put

S= Spot price (Current ,market value)