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Question 10 Consider the following pairs of options. For each pair, assume the risk-free rate is 5% and that the underlying stocks do not pay
Question 10 Consider the following pairs of options. For each pair, assume the risk-free rate is 5% and that the underlying stocks do not pay dividends. No marks will be awarded for correct answers without explanation. a) Which call option below is written on the stock with the lower volatility? Explain [2 points] CALL X SO Price of Option A 0.5 20 10 B 0.5 20 25 8 b) Which put option below is written on the stock with the lower price? Explain [2 points] PUT T Volatility Price of Option A 0.5 20 0.4 B 0.5 20 3 c) Which put option below is written on the stock with the lower volatility? Explain [2 points] PUT X SO Price of Option A 0.5 5 B 0.5 20 25 3 d) Which call option below has a shorter time to maturity? Explain (2 points] CALL Volatility SO Price of Option A 0.2 20 25 10 B 0.2 20 25 e) Which call option below has a lower exercise price? Explain [2 points) CALL Volatility T SO A 0.2 0.25 25 B 0.2 0.25 26 Price of Option 10 8
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