Short Answer Question

1.Google puts with 4 months to expiration and an exercise price of $680 trade for $27. Google calls with 4 months to expiration and an exercise price of $680 trade for $45. If the interest rate over 4 months is 1%, what price is Google stock trading for? Assume all options are European and Google pays no dividends.

2.. Will the value of a call option be larger or smaller, all else the same, if:

a. The volatility of the underlying asset is higher.

b. The option has 3 months rather than 6 months to expiration.

c. The exercise price was $15 rather than $10.

d. The stock price falls to $10 from $12.

3. Market efficiency implies that you might as well invest by picking a stock selected by a

dart thrown at the newspaper stock pages. Clearly state, True, False, or Uncertain." Explain.