9.

4 Implied volatility 149

Q: An American put option on a dividend paying stock with a maturity of six months is
available for trading. Ex-dividend date is three months later. Dividend on the ex-dividend
date is expected to be Rs.0.50. Current share price is Rs.40. Exercise price is Rs.40. Stock
price volatility is 30% per annum. Risk-fre e rate is 9% per annum. You should

1. Exercise the option just before the stock 3. Not exercise the option before the
goes ex-dividend. stock goes ex-dividend date.
2. Exercise the option just after the stock
goes ex-dividend. 4. None of the above.

A: In this case we find that

1 1
X[1-{ } = 40[1- ]=0.85
(1+r)(T-t) (1+0.09)0.25

Since the dividend of Rs.0.50 is less than the Rs.0.85, the option should be exercised before
the stock goes ex-dividend. The correct answer is number 2.

Q: An American call option on a dividend paying stock with a maturity of three months is
available for trading. Ex-dividend date is one months later. Dividend on the ex-dividend date
. Exercise price is Rs.80. Stock price
is expected to be Rs. 5. Current share price is Rs.100
volatility is 30% per annum. Risk-free rate is 9% per annum. You should .

1. Exercise the option just before the stock 3. Not exercise the option before the
goes ex-dividend. stock goes ex-dividend date.
2. Exercise the option just after the stock
goes ex-dividend. 4. None of the above.

A: The correct answer is number 1.

Q: Rahim is bullish about HLL which trades in the spot market at Rs. 1,025. He buys twenty
one-month call option contracts on HLL with a strike of 1050 at a premium of Rs. 10 per
call. A month later, HLL closes at Rs. 1,080. His profit on the position is .

1. Rs. 40,000 3. Rs. 60,0000

2. Rs. 45,000
4. Rs. 15,000
150 Using stock options

A: The correct answer is number 1.

Q: A put option should always be exercised if it is sufficiently deep in-the-

money.

1. early 3. at the beginning of the trading period

2. as late as possible
4. at the close of the trading period

A: The correct answer is number 1.