Question #103

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 49

Status: Unattempted

Correct Answer: A

Part of Context Group: Q103-104 First in Group
Shared Context
- After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the payoff diagram for an option as a function of the underlying stock price. Using this diagram, how is delta interpreted? Delta is the: A) slope in the option price diagram. B) level in the option price diagram. C) curvature of the option price graph.
Question
Washington is trying to determine the value of a call option. When the slope of the at expiration curve is close to zero, the call option is:
Answer Choices:
A. in-the-money
B. at-the-money
C. out-of-the-money
Explanation
When a call option is deep out-of-the-money, the slope of the at expiration curve is close to zero, which means the delta will be close to zero.
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