FIN 494 Exam Prepared 5_2020 | FIN494 Exam Prepared 5_Graded A

FIN 494 Exam Prepared 5 - 2020 Question 1 1. Which of the following statements is true? If interest rate is positive and the stock pays no dividends then it is better to keep an American call option alive than to exercise it even if it is far in the money It never makes sense to exercise an American put option early If a European option is priced below its lower bound, then the arbitrage includes borrowing at the risk-free rate Put-call parity holds for American options, just like it does for European options 10 points Question 2 1. You write a call option on Google. The current price of one share of Google is $400, the option strike price is $410, and the option premium is $5 (all prices are per share). On the expiration day, the price of Google is $425. The following statement is true: S0=400 X=41 0 ST=425 C=5 Write= -(St-X) -(425-410)= -15 The call is in the money Your payoff is negative