1. Explain why the following statement is true or false. 1)“A put seller is at risk...

1. Explain why the following statement is true or false.

1)“A put seller is at risk of losing money if the underlying price increases.”

2)“A call seller is obliged to buy the underlying share at the exercise price.”

2. What is the maximum profit potential if you long a call or put option?

Expert Solution

1. a. True.

A put seller is the one who writes the option to a put buyer. A put buyer makes money if the underlying price decreases below strike price. On contrary, put seller losses money if underlying price increases.

b. False

A call buyer will have right to buy the option but not the obligation. To contrary, call seller will have obligation to sell the option, not to buy

2. Unlimited profit potential for a long call option holder.

Maximum profit=share price-srike price-call premium

The increase in the share price is unlimited, hence the maximum profit is unlimited

For put option, the maximum profit=strike price-share price-put premium

Here the maximum share price can go up to 0.

Hence, the profit is limited.

jeff jeffy answered 3 years ago

Is this statement true or false? Explain why it is true or false. Two firms, 1...

Is this statement true or false? Explain why it is true or false. Two firms, 1 and 2, can control their emissions of a pollutant according to the following marginal cost equations: MC1 = $1*q1 and MC2 = $1/2*q2, where q1 and q2 are the amount of emissions controlled by firm 1 and firm 2, respectively. In addition, each firm is currently emitting 100 units of pollution and neither firm is controlling its emissions. Assuming the control authority has concluded...

True or False? If the following statement is false, briefly explain why it is false: Company...

True or False? If the following statement is false, briefly explain why it is false: Company A acquires 90% of Company B. Goodwill represents the difference between the book value of the subsidiary's net assets and the amount paid by the parent to buy ownership.

Indicate if the following statements are true or false. For false statements, explain why the statement...

Indicate if the following statements are true or false. For false statements, explain why the statement is false or give the correct answer.(1 point each) 6. A simple attribute can be broken down into smaller components. 7. The relationship between a weak and strong entity is called a multiple relationship. 8. An identifier is a combination of two or more attributes from two tables. 9. A unary relationship must have mandatory many cardinality on both sides. 10. If two entities...

Assess the validity of the following: If true, mark true; if false, explain why the statement...

Assess the validity of the following: If true, mark true; if false, explain why the statement is false. An increase in disposable income decreases the quantity demanded of inferior goods. Constant elasticity demand curves imply that expenditure (or revenue) always stay the same. Marginal Revenue is positive as long as Total Revenue is also positive. If in a model with only two goods the MRSX, Y is constant and greater than the price ratio PX/PY, the consumer buys no X....

Is the following statement true or false and HOW? "If a Seller of Real Estate retains...

Is the following statement true or false and HOW? "If a Seller of Real Estate retains a life estate in the sold property it means that he sold his real estate to a third party but retained the right to own the property until his death."

State whether the following statement is true or false AND explain why: "An increase in the...

State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."

1.Explain whether the following statement is true or false. There is no mark for stating true...

1.Explain whether the following statement is true or false. There is no mark for stating true or false; the mark is awarded for the explanation and the illustration only. Fiscal policy include building of new highways 2. If the government and the monetary authority think that the economy is growing too fast, what could they do to slow down the economy? 3. Discuss the effects of fiscal and monetary policy on inflation. Illustrate with good examples 4. If an economy...

Determine whether the statement is true or false. If it is false, explain why or give...

Determine whether the statement is true or false. If it is false, explain why or give an example that shows it is false. If f(c) = L,then lim x→c f(x) = L. False. Define f to be the piece-wise function where f(x) = x + 3 when x ≠ −1 and f(x) = 2 when x = −1. Then we have f(−1) = 2 while the limit of f as x approaches −1 is equal to −2. False. Define f...

True/False (3 pts each) Indicate whether the statement is true or false. If true, explain why...

True/False (3 pts each) Indicate whether the statement is true or false. If true, explain why it is true and/or give examples to support it. If false, explain why it is false. 2.An increase in plasma osmolality will cause more secretion of ADH.

Write TRUE if the statement is TRUE. If the statement is FALSE, write FALSE and explain...

Write TRUE if the statement is TRUE. If the statement is FALSE, write FALSE and explain why 3. The Commissioner of Internal Revenue may prescribe presumptive gross sales and receipts for a taxpayer when the latter fails to issue receipts and when he believes that the books or other records of the latter do not correctly reflect declarations in the return. 4. Jurisdiction is the power and authority of the court to hear, try, and decide a case. It can...

Question