15. Option Pricing

1. Other things being equal which of the following will cause the price of a call option on shares to increase?

A higher exercise price. Lower interest rates A fall in the volatility of the share A longer time to expiration.

2. An options theta measures the sensitivity of an option premium to:

a change in the price of the underlying share a change in the underlying value of the share a change in the interest rate the passing of time

3. A share has a current price of 100 pence, a call premium for a strike price of 80 pence is 40 pence, the risk free rate of interest is 4% and the expiration is in half a year’s time. According to Put-Call parity what is an appropriate value for the put premium for a strike price of 80 pence and six months to expiration?

19.8 pence 29.8 pence 39.8 pence none of the above

4. Other things being equal, which of the following will cause the price of a put option to fall?

A higher exercise price A higher price of the underlying share A rise in the volatility of the share A longer time to expiration

5. An option’s delta measures the sensitivity of an option premium to:

a change in the price of the underlying share a change in the volatility of the share a change in the interest rate the passing of time

6. A share has a current price of 100 pence, a call premium for a strike price of 90 pence is 19.35 pence, the risk free rate of interest is 6% and the expiration is in 3 months time. According to Put-Call parity what is an appropriate value for the put premium for a strike price of 90 pence and three months to expiration?

6 pence 8 pence 10 pence None of the above

7. Other things being equal, which of the following will cause the price of a call option to fall?

A lower exercise price. Higher interest rates A rise in the volatility of the share A shorter time to expiration

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