Analysis of Derivatives

Correct Answer: The price of the futures contract will decrease as the risk-free interest rate increases, due to the higher cost of carrying the underlying asset.

The price of the futures contract will decrease as the risk-free interest rate increases. This is because the futures price is determined by the spot price and the cost of carrying the underlying asset until the expiration of the futures contract. The cost of carry includes the risk-free interest rate, as it represents the opportunity cost of holding the underlying asset instead of investing the funds at the risk-free rate. When the risk-free rate increases, the cost of carrying the underlying asset rises, making it more expensive to hold the asset until the futures contract expires. As a result, the futures price must decrease to compensate for the higher carrying costs. The other two options are incorrect because: - An increase in the risk-free rate does not lead to investors seeking higher returns in the derivatives market, as the futures price is determined by the spot price and the cost of carry. - The risk-free interest rate does impact the pricing of futures contracts for non-dividend paying stocks, as it is a component of the cost of carry.

Correct Answer: The option price is expected to increase by approximately $0.70 (0.35 × $2).

The correct answer is that the option price is expected to increase by approximately $0.70. The change in the option price can be estimated using the delta value, which measures the sensitivity of the option price to changes in the underlying stock price. The delta value of 0.35 indicates that for every $1 increase in the stock price, the option price is expected to increase by approximately $0.35. Since the stock price increases by $2 in this scenario, the expected change in the option price can be calculated as follows: Change in option price = Delta × Change in stock price = 0.35 × $2 = $0.70 Therefore, if the stock price increases by $2, the option price is expected to increase by approximately $0.70, assuming all other factors remain constant.

Correct Answer: As implied volatility increases, the option price increases, assuming all other factors remain constant.

As implied volatility increases, the option price increases, assuming all other factors remain constant. This is the correct answer because implied volatility is a key factor in determining an option's price. Implied volatility represents the market's expectation of the underlying asset's potential price fluctuations. When implied volatility rises, it suggests that the market anticipates greater price movements, which in turn increases the probability of the option expiring in-the-money. As a result, the option's price will increase to reflect this higher probability. The other answers are incorrect: Answer 256451 states the opposite relationship between implied volatility and option price, which is not accurate. Answer 256453 suggests that implied volatility has no impact on option price, which is also incorrect, as implied volatility is one of the key factors influencing an option's price.