YOUR KILLER EQUITIES INTERVIEW QUESTIONS: An at the money (ATM) call option is worth $10 today and has 1 year left to expiry....

24 June 2011

1 minute read

YOUR KILLER EQUITIES INTERVIEW QUESTIONS: An at the money (ATM) call option is worth $10 today and has 1 year left to expiry....

Here's the latest question sent in by site visitors who have attended equities interviews at investment banks. This was allegedly asked in an interview for an equity derivatives trading role at Merrill Lynch. Let us know if you have any comments or disagree with the answer.

THE QUESTION: An at the money (ATM) call option is worth $10 today and has 1 year left to expiry. If the stock does not move and nor do any other parameters (e.g. volatility etc.), what is the price of the option after 6 months?

THE ANSWER THAT WAS GIVEN:

$7.071, this is calculated as: the square root of (0.5yrs) x $10, since an options price is proportional to the square root of time.

AUTHOReFinancialCareers UK

Insider Comment

no
noname
28 June 2011
Approximation works for sigma*sqrt(T)<<1
Getting the answer right is good, but that usually isn't the point...
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le
leeson
27 June 2011
@Simo - you really are weak
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Al
AliDesai
27 June 2011
@Simo - I fear that you have not understood the question. The implied assumption is that when the stock price is observed in 6 months time it is at the same level as when it was observed 6 months prior. It might have moved around in the intervening period (volatility) but by sheer coincidence it is back to the level it was before. The other stated assumption is that interest rates, dividends, stock borrow costs etc are the same as before.
Looks like you should brush up on your derivatives before trying to get a job in a bank. If you have any cares, Charlie would be more than happy to tutor you.
Reply
Si
Simo
27 June 2011
In fact those Traders are so stupid, sorry for this. If there is no volatility how an ATM option will be worth 10$, the interviewer was trying to ask a very classic question regarding BS model for ATM option but the question should be ask otherwise.....
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ja
james
25 June 2011
why would it be the future value of $10 its not a bond we are talking about, ATM the option has zero intrinsic value were it to remain ATM until expiry it would be worthless, this is simply a question about theta....and agree hardly killer...something like you have a deep ITM call option maturity 1yr and its got 11 month to expiry....if spot and all other parameters remain the same is the price greater or lower at expiry...
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