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34 AM 4. The current price of a non-dividend paying stock is $30. Over the next six months it is expected to rise to $36

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34 AM 4. The current price of a non-dividend paying stock is $30. Over the next six months it is expected to rise to $36 or full to $36. Assume the risk-free rate is zero. An investor sells six month call options with a strike price of Sa. Which of the following hedges the position? Hint: Use a no-arbitrage argument. a. Buy 0.6 shares for each call option sold. b. Buy 0.4shares for each call option sold. Short 0.6 shares for each call option sold. d. Short 0 shares for each call option sold. 15. A stock is expected to return 10% when the risk-free rate is 1%. What is the correct discount rate to use for the expected payoff on an option in the real world? More than 10% d. We do not know it could be more or less than to lit 11. If time to expiration increases while all other variables affecting stock option prices are kept fixed, then: a. The price of European options (both put and call) increases, while the price of American options (both put and call decreases b. The price of European options (both put and cald decreases, while the price of American options (both put and cold decrease. d. None of the above. 11. Which of the following statements is not true: a la call option is exercised at some future time, the payot will be the amount by which the stock price exceeds the exercise price b. If the risk free rate goes up while all other variables afecting stock option prices are kept feed, then the price of a pean put option is expected to go down C. The purcal party is out an important relationship between the prices of European put and call options that have the same strike price and time to maturity d. None of the above 13. Which of the following features does not characterize a risk neutral world: a. The expected return on a stock for any other investment is the rise free rate the to an option for any other the discount rate used for the expected . Investors are assumed to be tisk neutral d. None of the but

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