Investments Final Exam Review
Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2. What is the lowest stock price at which you can break even?
$103
Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?
$11.97
HighFlyer stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk free interest rate is 6%. What is the price of a one-year put with strike price of $55?
$12.89
ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk free interest rate is 4%. What is the price of a one-year put with strike price of $45?
$14.26
Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?
$15.26
Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2. The maximum potential profit of your strategy is:
$200
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the risk-free rate is 6%, what should be the value of a put option on the same stock with the same strike price and expiration date?
$3.00
Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2. The maximum loss you could suffer from your strategy is:
$300
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?
$4
You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?
$4,800
You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position?
$45
Use the Black-Scholes Option Pricing Model for the following problem. Given: So = $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily). No dividends will be paid before option expires. The value of the call option is ____.
$5.16
You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to:
$52 and $68
An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call?
$6
You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy?
$6,600
Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call?
$6.23
You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position?
$65
You purchase one IBM 70 call option for a premium of $6. Ignoring transaction costs, the breakeven price of the position is:
$76
You purchase one JNJ 75 call option for a premium of $3. Ignoring transaction costs, the break-even price of the position is:
$78
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call?
$8
An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the intrinsic value of the call?
$8
You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be:
$800
You purchase one IBM March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?
$9,400
The Black-Scholes formula assumes that:
I, II, III, and IV
You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as:
a horizontal spread; a time spread
A protective put strategy is:
a long put plus a long position in the underlying asset
You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called:
a long straddle
You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as:
a vertical spread; a money spread
The put-call parity theorem:
all of the above
An American call option can be exercised:
any time on or before the expiration date
An American put option can be exercised:
any time on or before the expiration date
Relative to non-dividend-paying European calls, otherwise identical American call options:
are equal in value
Relative to European puts, otherwise identical American put options:
are more valuable
Buyers of call options ____ required to post margin deposits and sellers of put options ____ required to post margin deposits.
are not; are
An option with an exercise price equal to the underlying asset's price is:
at the money
A call option has an intrinsic value of zero if the option is:
at the money or out of the money
A put option has an intrinsic value of zero if the option is:
at the money or out of the money
An American call option allows the buyer to:
buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration
Call options on IBM listed stock options are:
created by investors and traded on various exchanges
Buyers of put options anticipate the value of the underlying asset will ____ and sellers of call options anticipate the value of the underlying asset will ____.
decrease; decrease
If the stock price increases, the price of a put option on that stock ____ and that of a call option ____.
decreases; increases
You purchased a call option for a premium of $4. The call has an exercise price of $29 and is expiring today. The current stock price is $31. What would be your best course of action?
exercise the call because the stock price is greater than the exercise price
All else equal, call option values are lower:
for high dividend payout policies
Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share:
increases to $105
If the stock price decreases, the price of a put option on that stock ____ and that of a call option ____.
increases; decreases
The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call:
is at the money
The current market price of a share of IBM stock is $80. If a call option on this stock has a strike price of $80, the call:
is at the money
The current market price of a share of MOT stock is $24. If a call option on this stock has a strike price of $24, the call:
is at the money
The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call:
is in the money an sells for a higher price than if the market price of CSCO stock is $21
The current market price of a share of CAT stock is $76. If a put option on this stock has a strike price of $80, the put:
is in the money and can be exercised profitably
The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put
is in the money and can be exercised profitably
The current market price of a share of PALM stock is $75. If a put option on this stock has a strike price of $79, the put:
is in the money and can be exercised profitably
The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call:
is in the money and sells for a higher price than if the market price of AT&T stock is $40
The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call:
is in the money and sells for a higher price than if the market price of Boeing stock is $70
The current market price of a share of Boeing stock is $75. If a put option on this stock has a strike price of $70, the put:
is out of the money
The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call:
is out of the money
The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the put:
is out of the money
The current market price of a share of a stock is $20. If a put option on this stock has a strike price of $18, the put:
is out of the money
The current market price of a share of CSCO stock is $22. If a put option on this stock has a strike price of $20, the put:
is out of the money and sells for a higher price than if the strike price of the put option was $25
The current market price of a share of AT&T stock is $50. If a put option on this stock has a strike price of $45, the put:
is out of the money and sells for a lower price than if the market price of AT&T stock is $40
The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put:
is out of the money and sells for a lower price than if the market price of JNJ stock is $50
The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put:
is out of the money and sells for a lower price than if the market price of the stock is $75
Which one of the following variables influences the value of call options?
level of interest rates; time to expiration of the option; dividend yield of underlying stock; stock price volatility
Which one of the following variables influences the value of put options?
level of interest rates; time to expiration of the option; dividend yield of underlying stock; stock price volatility
To the option holder, put options are worth ____ when the exercise price is higher; call options are worth ____ when the exercise price is higher.
more; less
Higher dividend payout policies have a ____ impact on the value of the call and a ____ impact on the value of the put.
negative; positive
The price of a stock put option is ____ correlated with the stock price and ____ correlated with the striking price.
negatively; positively
An American call option buyer on a non-dividend paying stock will:
never exercise the call early
The price that the writer of a put option receives for the underlying asset if the option is exercised is called the:
none of the above
Exchange-traded stock options expire:
on the third Friday of the expiration month
A European call option can be exercised:
only on the expiration date
A European put option can be exercised:
only on the expiration date
Before expiration, the time value of an at the money call option is always:
positive
Before expiration, the time value of an at the money put option is always:
positive
Before expiration, the time value of an in the money call option is always:
positive
Before expiration, the time value of an in the money put option is always:
positive
Lower dividend payout policies have a ____ impact on the value of the call and a ____ impact on the value of the put.
positive; negative
The price of a stock call option is ____ correlated with the stock price and ____ correlated with the striking price.
positively; negatively
A European put option allows the holder to:
potentially benefit from a stock price decrease with less risk than short shelling the stock and sell the underlying asset at the striking price on the expiration date
The price that the buyer of a call option pays to acquire the option is called the:
premium
The price that the buyer of a put option pays to acquire the option is called the:
premium
The price that the writer of a call option receives to sell the option is called the:
premium
The price that the writer of a put option receives to sell the option is called the:
premium
A European call option allows the buyer to:
sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date
An American put option allows the holder to:
sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price decrease with less risk than short selling the stock
A covered call position is equivalent to a:
short put
Empirical tests of the Black-Scholes option price model:
show that the model generates values fairly close to the prices at which options trade; indicate that the mispricing that does occur is de to the possible early exercise of American options on dividend-paying stocks
The price that the buyer of a call option pays for the underlying asset if she executes her option is called the:
strike price or exercise price
The price that the buyer of a put option receives for the underlying asset if she executes her option is called the:
strike price or exercise price
The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the:
strike price or exercise price
Before expiration, the time value of a call option is equal to:
the actual call price minus the intrinsic value of the call
Prior to expiration:
the actual value of a put option is greater than the intrinsic value
Prior to expiration:
the actual value of call option is greater than the intrinsic value
The maximum loss a buyer of a stock call option can suffer is equal to:
the call premium
According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to:
the call value plus the present value of the exercise price minus the stock price
The time value of a call option is:
the difference between the option's price and the value it would have if it were expiring immediately; different from the usual time value of money concept
The time value of a put option is:
the different between the option's price and the value it would have if it were expiring immediately; different from the usual time value of money concept
The Option Clearing Corporation is owned by:
the exchanges on which stock options are traded
Other things equal, the price of a stock call option is positively correlated with the following factors except:
the exercise price
A call option on a stock is said to be at the money if:
the exercise price is equal to the stock price
A put option on a stock is said to be at the money if:
the exercise price is equal to the stock price
A call option on a stock is said to be out of the money if:
the exercise price is higher than the stock price
A put option on a stock is said to be in the money if:
the exercise price is higher than the stock price
A call option on a stock is said to be in the money if:
the exercise price is less than the stock price
A put option on a stock is said to be out of the money if:
the exercise price is less than the stock price
The intrinsic value of an in-the-money put option is equal to:
the exercise price minus the stock price
To adjust for stock splits:
the exercise price of the option is reduced by the factor of the split and the number of option held is increased by that factor
What happens to an option if the underlying stock has a 2-for-1 split?
the exercise price would become half of what it was and the number of options held would double
All of the following factors affect the price of a stock option except:
the expected rate of return on the stock
Currency options and currency futures options have different values because:
the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity
A covered call position is:
the purchase of a share of stock with a simultaneous sale of a call on that stock
The maximum loss a buyer of a stock put option can suffer is equal to:
the put premium
Other things equal, the price of a stock put option is positively correlated with the following factors except:
the stock price
The value of a stock put option is positively related to the following factors except:
the stock price
The intrinsic value of an in-the-money call option is equal to:
the stock price minus the exercise price
Protective puts offer an advantage over stop-loss orders in that:
the stop-loss order will be executed as soon as the stock price reaches the trigger point, without allowing for a subsequent rebound, while the put allows the holder to wait; the stop-loss order may actually be executed at a price below the trigger price
The maximum loss the writer of a stock put option can suffer is equal to:
the striking price minus the put premium
All the inputs in the Black-Scholes Option Pricing Model are directly observable except:
the variance of returns of the underlying asset return
Derivative securities are also called contingent claims because:
their payoffs depend on the prices of other assets
The potential loss for a writer of a naked call option on a stock is:
unlimited
Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2. If, at expiration, the price of a share of IBM stock is $103, your profit would be:
zero
The intrinsic value of an at-the-money call option is equal to:
zero
The intrinsic value of an at-the-money put option is equal to:
zero
The intrinsic value of an out-of-the-money call option is equal to:
zero
The intrinsic value of an out-of-the-money put option is equal to:
zero
