Implies that immediate exercise would generate a positive cash flow.

Implies that immediate exercise would generate a negative cash flow.

The standard deviation of stock returns that is consistent with an option’s market value.

Uses the stock price, the risk-free interest rate, the time to expiration, and the standard deviation of stock returns to estimate the value of an option for that stock.

Involves buying both a put and call option for the same expiration date and strike price on the same underlying security.

Involves buying an out-of-the-money put option while simultaneously writing an out-of-the-money call option.

A ratio that compares the change in the price of an underlying asset with the change in the price of a derivative or option.

A strategy designed to protect a portfolio of investments against potential losses.

Option values increase with greater volatility, all else equal.

Option values decrease with greater volatility, all else equal.

Optiona values increase with greater time-till-experiation, all else equal.

Optiona values decrease with greater time-till-experiation, all else equal.

American options are typically worth more (or at least as much as) than European options.

European options are typically worth more (or at least as much as) than American options.

If banks think the government will bail them out in the event of a crisis, this increases their incentive to take on more risk.

If banks think the government will bail them out in the event of a crisis, this decreases their incentive to take on more risk.

If you think a stock price is going to fall, buying a put option would be a good strategy.

If you think a stock price is going to fall, buying a call option would be a good strategy.

The Black-Scholes model provides an estimate for European call or put options.

The Black-Scholes model provides an estimate for American call or put options.

A long straddle position (i.e., buying a straddle) is a good strategy if you think a stock price will either increase or decrease significantly.

A short straddle position (i.e., selling or issuing a straddle) is a good strategy if you think a stock price will either increase or decrease significantly.

Bond ratings agencies contributed to the financial crisis by failing to privde accurate early warning signals about the riskiness of subprime mortgages.

Bond ratings agencies helped dampen the effects of the financial crisis by providing accurate early warning signals about the riskiness of subprime mortgages.