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www.edupristine.com   Derivatives   Topic Weight: 5%© PristineThis Presentation has been prepared to provide general infor...
Variables affecting Option Prices                                  European Call    European Put      American Call   Amer...
Concept Checkers       1. If the volatility of the underlying asset decreases, then the:       A. Value of the put option ...
Answers       1. C, with the increase in the volatility, the price of all the options increases       2. C, high interest ...
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CFA Derivatives

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CFA Derivatives financial instruments that derive their value from the value of some underlying asset i have become increasingly important and fundamental in effectively managing financial risk and creating synthetic exposures to asset classes. As in other security markets, arbitrage and market efficiency play a critical role in establishing prices.

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CFA Derivatives

  1. 1. www.edupristine.com Derivatives Topic Weight: 5%© PristineThis Presentation has been prepared to provide general information about theCompany to whom it is addressed. This Presentation does not purport to contain allthe information. The information provided in this presentation is meant only forthe recipient and is not to be shared with anyone else.
  2. 2. Variables affecting Option Prices European Call European Put American Call American Put Variable c=Max(S-X,0) p=Max(X-S,0) C=Max(S-X,0) P=Max(X-S,0) Current Stock Price + - + - (St) Strike Price (X) - + - + Time to Expiry (T) ? ? + + Volatility (Sigma) + + + + Risk Free Rate (r) + - + - Dividends (D) - + - + X Put-Call Parity: ct  (T  t)  p t  St  PV(D) where PV(D) is the present value (1  r) of the dividend paid in futurePristine www.edupristine.com 2
  3. 3. Concept Checkers 1. If the volatility of the underlying asset decreases, then the: A. Value of the put option will increase, but the value of the call option will decrease B. Value of the put option will decrease, but the value of the call option will increase C. Value of both the put and call option will decrease 2. Which of the following features increase the value of a call option? A. High interest rate B. Highly variable stock price C. All of the abovePristine www.edupristine.com 3
  4. 4. Answers 1. C, with the increase in the volatility, the price of all the options increases 2. C, high interest rate and high volatility increase the price of the call optionPristine www.edupristine.com 4

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