Select all of the statements below that are TRUE.

Question

Select all of the statements below that are TRUE.

BlackTom AI · Accepted Answer

The question asks you to identify all statements that are true. I will evaluate each option in turn and explain why it is true or false, so you can see the underlying concepts.
Option 1: 'The price of a European call option increases as its strike price decreases.' This is true because a lower strike price makes it more likely that the call will end up in the money at or before expiration, increasing its intrinsic value and generally its premium. As strike falls, the payoff potential improves for the same underlying price, all else equal.
Option 2: 'An investor who expects the price of the underlying to go up can short put options.' This statement is true in a bullish scenario: selling (shorting) a put collects premium, and if the underlying price rises, the put is likely to expire worthless, yielding a profit equal to the premium. Of course, this strategy carries downside risk if the price falls, but the action itself is a valid bullish strategy.
Option 3: 'The price of an American put option increases as its strike price decreases.' This is false. For puts, a higher strike increases the option’s value because it has more intrinsic value when the stock price is below the strike. Therefore, as the strike decreases, the put’s value tends to fall, not rise.
Option 4: 'Prices of American call options do not exceed prices of otherwise identical European call options.' This is false in general. American options are at least as valuable as European options, and often more valuable because they can be exercised early. The statement claiming American calls never exceed European prices is incorrect; in fact, American prices can be higher.
Option 5: 'All else being equal, option prices increase as they approach maturity.' This is false. Time value generally decays as maturity nears, so option prices tend to decrease with time to maturity, all else equal (except in-the-money intrinsic value considerations at the moment of maturity). The typical pattern is decay in time value rather than an increase.

In summary, Options 1 and 2 are true, while Options 3, 4, and 5 are false. The reasoning reflects core ideas about option pricing: strike level effects on call value, the nature of bullish strategies with puts, how strike affects put value, the relationship between American and European option values, and time decay as expiration approaches.

COMM_V 371 101-107 2025W1 COMM 371 2025W1 Final Exam - Dec 09 - Requires Respondus LockDown Browser

Select all of the statements below that are TRUE.

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