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d. Call options generally sell at prices above their exercise value, but for
an in-the-money option, the greater the exercise value in relation to the
strike price, the lower the premium on the option is likely to be.
e. Because of the put-call parity relationship, under equilibrium
conditions a put option on a stock must sell at exactly the same price as a
call option on the stock.
3. Which of the following statements is CORRECT?
a. An option's value is determined by its exercise value, which is the
market price of the stock less its striking price. Thus, an option can't sell
for more than its exercise value.
b. As the stock’s price rises, the time value portion of an option on a
stock increases because the difference between the price of the stock and
the fixed strike price increases.
c. Issuing options provides companies with a low cost method of raising
capital.
d. The market value of an option depends in part on the option's time to
maturity and also on the variability of the underlying stock's price.
e. The potential loss on an option decreases as the option sells at higher
and higher prices because the profit margin gets bigger.
4. The current price of a stock is $22, and at the end of one year its price
will be either $27 or $17. The annual risk-free rate is 6.0%, based on
daily compounding. A 1-year call option on the stock, with an exercise
price of $22, is available. Based on the binominal model, what is the
option's value?