University Finance: Options and Derivatives Practice Questions

This homework assignment provides a comprehensive set of multiple-choice questions focusing on options and derivatives, a crucial area within finance. The questions cover a range of topics, including the justification for early exercise of American put options, the characteristics of American-style call options, the impact of cash dividends on option values, the rights of a long call option holder, and the minimum values of American-style options. The assignment delves into the single-period binomial model, exploring hedge ratios and arbitrage strategies. It also covers bullish strategies, the effect of volatility on option prices, implied volatility, protective put buying, bull put spread option strategies, embedded options in capital investment projects, and option time value decay. Furthermore, it examines the choice of exercise price, naked put options, and the Black-Scholes-Merton option valuation model, including calculations and interpretations. Finally, the assignment explores put-call parity and the binomial option pricing model with a two-period model example, including the calculation of the equivalent martingale measure.