Basics of Derivative Pricing and Valuation II

Which of the following is most probable? The value of a European option is generally worth more when the time to expiration is longer because:

The call options of Stock A and Stock B both expire in-the-money by $10. The inherent volatility of stock A is much higher than stock B. Comparatively, what is the most probable value to the long call for the 2 stocks?

Which of the following statements regarding a European put option is most accurate?

Which of the following statements is least accurate?

Based on the put-call parity, which of the following portfolios is risk-free?

Based on put-call-forward parity, a long put can be replicated using:

A stock is trading at $100, and it has a put option with 3 months to expiry (X=$110), last traded at $12. There is also a corresponding call option with 3 months to expiry (X=$110) that is thinly traded. An analyst wishes to calculate the no-arbitrage price of this call option using put-call parity. Assuming a risk-free rate of 6%, what is the price closest to?

Ricky Fernandes, CFA, would like to estimate the intrinsic price of a 1-year call option. The underlying stock was last traded at $180. Ricky estimates that the size of an up move to be 60%. Assuming a risk-free rate of 5%, calculate the risk-neutral pseudo probability of an up-move.

Ricky Fernandes, CFA, would like to estimate the intrinsic price of a 1-year call option with an exercise price of $160. The underlying stock was last traded at $180. Ricky estimated the following parameters for the binomial pricing model.

U=1.6
D=0.625
Pi_U=0.436
Pi_D=0.564

Assuming a risk-free rate of 5%, calculate the price of the call option using the binomial model.