TRUE or FALSE 1). The increase in the volatility of the security has the impact of...

TRUE or FALSE

1). The increase in the volatility of the security has the impact of the increase in the value of the call option and the decrease in the value of the put option.

2)An investor may acquire a call option to protect a short selling position.

Thank you

Expert Solution

1. The given statement is FALSE as The increase in volatility of a security increases the value of a call option and also of put option. The increase in volatillity positively impact the value of both the options positively.

So the statement that states that Increase in the volatillity of a security impact call positively and put option negatively is incorrect.

2. The given statement is TRUE as it is highly common to hedge a short selling position with calls of the same security.

When an investor has a short selling position, the risk he carries is that any untimely upward movement in stock will make him lose money, but when he hedges it with a call of the same security, The losses made in short selling position will be minimised with gains on the call options of the same security.

So it is a correct option which states that An investor may acquire a call option to protect short sale position.

jeff jeffy answered 1 year ago

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