2) Options

Question 1

What is a Call Option

Answer 1

A call option gives the holder the right, but not the obligation to buy the underlying, S, at (or before) a certain date, T, for a certain price, known as the exercise (or strike) price, X

Question 2

What is a Put Option

Answer 2

A put option gives the holder the right, but not the obligation to sell the underlying, S, at (or before) a certain date, T, for a certain price, known as the exercise (or strike) price, X

Question 3

What is a European and American Call Option

Answer 3

• A European option can can only be exercised at the expiration date T
• An American option can be exercised at any time up to and including the expiry date, T

Question 4

What is the value of a European Call Option

Answer 4

C(S, T) = max(S − X, 0)

Question 5

What is the value of a European Put Option

Answer 5

P(S, T) = max(X − S, 0)