Essays on Options, Futures and Other Derivatives Assignment

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The paper “ Options, Futures and Other Derivatives”   is a   worthy example of an assignment on finance & accounting. DerivaGem shows that an American- put option is 4.57. Put option’ s intrinsic value is the difference between the strike price and the underlying price. The Strike price is $32, and the underlying price is $30. Therefore the Put option’ s intrinsic value =$32 -$30 =$2.B) The option's time value is the difference between the option price and the intrinsic or exercise value. Therefore $4.57 -$2 = 2.57C) The time value of zero indicates that it is best to exercise the option straightaway.

The value of an option with zero-time value is equal to its instructive value in this case. D) DerivaGem shows that the option is $12(also its intrinsic value) when the stock value is 20. DerivaGem also shows that the option value is 7.54 when the stock price is 25. At this point, the time value is still positive that is 0.54. The closer the steps equal to 50, the trial and error approach shows that the time value fades as the stock price reduces to $21.69 and lower.

When one takes 500 steps, the stock price reduces further to 21.35 (Hull, 2006). Question 2(A) DerivaGem indicates that the value or the price of the European call option is 6.9686.(B) The European put option’ s value is 4.1244.(C) C + D + Ke -rT = 6.9686 + 0.5e -0.06*0.5 + 40e -0.06*1 =45.1244 AlsoP + s = 4.1244 + 41 = 45.1244(D) Using DerivaGem, the price of the options approaches the stock price of 41 as a time to maturity becomes very large. The reason is for the time becoming large is that it does not have to take a long time to pay the price of a call option.

Therefore, the present amount of what is supposed to be paid is close to zero. The European put option’ s price becomes close to zero as the time to maturity becomes very large. The reason for the put option being close to zero is because of the present value of what is expected to be received is close to zero. The DerivaGem backs explanation as to the test results that show when T = 100, the stock price is 40.94 which is close to 41.

Therefore, the European put option becomes 0.04 which is close to zero (Hull, 2006).

Reference

Hull, J. C. (2006). Options, futures, and other derivatives. Pearson Education.
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