T/F Questions

VIX. Low levels of VIX correspond to perceived risky markets while high levels of VIX correspond to less risk markets. 32) Implied Volatility: If the anticipated volatility forecast by the analyst is greater than the implied volatility (the standard deviation of stock returns consistent with the options price), the call option is considered a buy. If the anticipated volatility is less, the analyst shou ld consider selling or writing the call option. 33) Put-Call Parity: The put-call parity theorem relates the prices of calls and puts. If the relationship is violated, arbitrage opportunities will result. 34) Option Hedge Ratio: Hedge ratios (or deltas) are zero for deep out-of-the-money call options, one for at-the-money calls, and two for deep in-the-money calls. 35) Futures Hedge Ratio: In general, the hedge ratio is the number of futures contracts one would need to offset the risk of a particular unprotected position. Futures contracts could be used to hedge interest rates, stock market indices, currency, or commodity risk. 36) Binomial and Black Scholes Option Pricing Model: The multi period approach to option pricing is labeled the binomial model and with the use of continuously compounded mathematics, the Black Scholes pricing formula can be derived. The Black Scholes model assumes a time varying volatility over the life of the option except at the end of the contract where convergence happens. 37) European vs. American style options. European style options can be exercised early (i.e., at any time over the life of the contract) while American style can be exercised on at the maturity date of the contract. 38) Credit Default Swaps (CDS). CDS are in effect, an insurance product that pays off in the event of a trigger event (some sort of technical or real default). The protection buyer receives a premium from the protection seller for the effort