Question 6

Explain each of the determinants of the value of a call option? Is there a direct or indirect (inverse) relationship between this determinant and the value of a call option?

Question 7

Consider the futures contract written on the S&P 500 Index and maturing in 6 months. The interest rate is 3% per 6-month period, and the future value dividends expected to be paid over the next 6 months is $15. The current index level is 1,425. Assume that you can short sell the S&P index. Suppose the future price is 1,422. Is there an arbitrage opportunity here ? If so, how would you exploit it ?

Question 8

Is a put option on a high-beta stock worth more than a low-beta stock ? The stocks have identical firm-specific risk.

Question 9

What are the P/E effect and Momentum effect considered efficient market anomalies? Are there rational explanations for any of these effects ?