9.4 Implied volatility
149
Q: An American put option on a dividend paying stock with a maturity of six months is available for trading. Ex-dividend date is three months later. Dividend on the ex-dividend date is expected to be Rs.0.50. Current share price is Rs.40. Exercise price is Rs.40. Stock price volatility is 30% per annum. Risk-fre e rate is 9% per annum. You should 1. Exercise the option just before the stock goes ex-dividend.
3. Not exercise the option before the stock goes ex-dividend date.
2. Exercise the option just after the stock goes ex-dividend.
4. None of the above.
A: In this case we find that X[1-{
1 1 } = 40[1]=0.85 (1+r)(T-t) (1+0.09)0.25
Since the dividend of Rs.0.50 is less than the Rs.0.85, the option should be exercised before the stock goes ex-dividend. The correct answer is number 2.
Q: An American call option on a dividend paying stock with a maturity of three months is available for trading. Ex-dividend date is one months later. Dividend on the ex-dividend date is expected to be Rs. 5. Current share price is Rs.100 . Exercise price is Rs.80. Stock price volatility is 30% per annum. Risk-free rate is 9% per annum. You should . 1. Exercise the option just before the stock goes ex-dividend.
3. Not exercise the option before the stock goes ex-dividend date.
2. Exercise the option just after the stock goes ex-dividend.
4. None of the above.
A: The correct answer is number 1.
Q: Rahim is bullish about HLL which trades in the spot market at Rs. 1,025. He buys twenty one-month call option contracts on HLL with a strike of 1050 at a premium of Rs. 10 per call. A month later, HLL closes at Rs. 1,080. His profit on the position is .
1. Rs. 40,000
3. Rs. 60,0000
2. Rs. 45,000 4. Rs. 15,000
150
Using stock options
A: The correct answer is number 1.
Q: A put option should always be exercised
if it is sufficiently deep in-the-
money.
1. early
3. at the beginning of the trading period
2. as late as possible 4. at the close of the trading period
A: The correct answer is number 1.