Consider Two European Put Options,with Maturities Three Months and Six

question 14

Multiple Choice

Consider two European put options,with maturities three months and six months on the same stock and same strike price.The stock pays no dividends.Which of the following statements is most accurate?

• A)The three-month option must be worth more than the six-month option.
• B)The three-month option must be worth less than the six-month option.
• C)The three-month option must be worth less than the six-month option if the option is deep in-the-money.
• D)The three-month option may be worth more than the six-month option.

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Definitions:

Variable Costs

Expenses that vary in direct relation to the amount of output or sales.

Fixed Costs

Expenses that do not change with the level of output or sales, such as rent, salaries, and insurance, remaining constant regardless of business activity levels.

Margin of Safety

The difference between actual or anticipated sales and the sales level at the break-even point, measured to assess the risk of not covering fixed costs.

Contribution Format

A method of income statement presentation where costs are separated into variable and fixed categories, emphasizing the contribution margin.