Financial Engineering Test 1

Suppose you purchase one GE May 90 Call contract at $9 and write one GE May 100 Call Contract at $5. The maximum loss you could suffer from your strategy is a) $200 b) $300 c) Zero d) $400 e) $600

$400

Suppose you purchase one GE May 90 Call contract at $9 and write one GE May 100 Call Contract at $5. The maximum potential profit from your strategy is a) $600 b) $400 c) $300 d) $200 e) $100

a) $600

Suppose you purchase one GE May 90 Call contract at $9 and write one GE May 100 Call Contract at $5. The option strategy is called a a) Bull Spread b) Bear Spread c) Time spread d) Inverted call Spread e) Butterfly spread

a) Bull Spread

Which of the following is most equivalent to writing a Straddle? a) Buy Stock, Write two calls b) Buy Stock, Buy one put c) Short Stock, Buy one call d) Short Stock, Buy one put e) Short Stock, Buy two puts

a) Buy Stock, Write two calls

A protective Put position is equivalent to: a) Long Call b) Short Call c) Long Straddle d) Vertical spread e) None of the above

a) Long Call

Suppose you purchase one GE May 90 Call contract at $9 and write one GE May 100 Call Contract at $5. What is the break even stock price? a) $92 b) $94 c) $96 d) $98 e) None of the above

b) $94

To terminate an option prior to expiration, a writer of a naked call can later a) Sell the option b) Buy the option c) Exercise the option and sell the underlying stock at the strike price d) Buy the underlying stock e) A and C

b) Buy the option

The rapid incorporation of news into asset prices is referred to as a) Transactional Efficiency b) Informational Efficiency c) Price Risk d) Business Risk e) Value Additivity

b) Informational Efficiency

To terminate their option position, a writer of a put can later a) sell the put option b) buy the put option c) buy the similar call option d) sell the similar call option e) A and C

b) buy the put option

A seller of a strangle has a) limited upside potential and limited downside risk b) limited upside potential and unlimited downside risk c) unlimited upside potential and limited downside risk d) unlimited upside potential and unlimited downside risk e) a break even stock price equal to the put plus call premiums

b) limited upside potential and unlimited downside risk

If there is still time left before expiration, the time value of a call option is equal to: a) zero, if the stock price is less than the strike price b) the actual call price minus the intrinsic value of the call c) the intrinsic value of the call d) the actual call price plus the intrinsic value of the call e) none of the above

b) the actual call price minus the intrinsic value of the call

It is optimal to exercise an American Call right before the ex-dividend date if a) the time value is greater than the present value of future dividends b) the time value is less the present value of future dividends c) the intrinsic value is greater than the present value of future dividends d) the intrinsic value is less than the present value of future dividends e) intrinsic value is 0

b) the time value is less the present value of future dividends

You write one CITI March 30 put for a premium of $5. Ignoring transaction costs, what is the breakeven price of this position? a) $30 b) $35 c) $25 d) $20 e) None of the above

c) $25

Suppose you buy a call with K=$50 and buy a put with K=$40, both on the same stock with the same expiration date. The maximum loss occurs when a) S<$40 b) S=$40 c) $40<S<$50 d) S=$50 e) S>$50

c) $40<S<$50

You write one GM February 50 Put for a premium of $5. Ignoring Transaction costs, what is the breakeven price of this position? a) $50 b) $55 c) $45 d) $40 e) none of the above

c) $45

A European call has the a price of $3.50 and a European put has a price $1.25. Both Options are written on the same underlying stock and expire in 6 months. Assume the risk free rate is 10% and dividends = 0. If the strike price for both options is $50, the stock price must be equal to: a) $47.49 b) $52.35 c) $49.81 d) $45.31 e) there is not enough information

c) $49.81

A catastrophe bond sold by an insurance company that pays variable interest depending upon insurance claims relative to premiums collected mainly addresses a) Systematic Risk b) Financial Risk c) Business Risk d) Model Risk e) Interest Rate Risk

c) Business Risk

CAT Bonds have payouts that are inversely related to insurance claims from catastrophes such as hurricanes. These financially engineered securities principally address: a) Market Risk b) Financial Risk c) Business Risk d) Model Risk e) Default Risk

c) Business Risk

Relative to European Calls on non-dividend paying stocks, otherwise identical American Call options should be: a) Less Valuable b) More Valuable c) Equal in value d) Exercised Earlier e) Optimally exercised early

c) Equal in value

A redundant Asset: a) Provides new risk and return opportunities to the investor b) Helps complete the market c) Has expected cash flows that are the same as the instruments that already trade d) must earn the risk free rate of return e) has a normal distribution of returns

c) Has expected cash flows that are the same as the instruments that already trade

What happens to an option if the underlying stock has a 2 for 1 split? a) There is no change in either the exercise price or in the number of options held b) The exercise price will adjust through normal market movements; the number of options will remain the same c) The exercise price would become half of what it was and the number of options held would double d) The exercise price would double and the number of options held would double e) The exercise price would double and the number of options held would become half of what it was

c) The exercise price would become half of what it was and the number of options held would double

Selling a stock short and simultaneously buying a call is similar to a) writing a call b) writing a put c) buying a put d) buying a straddle e) investing in a risk free asset

c) buying a put

To the option holder, put options are worth ............ when the exercise price is lower, call options are worth ............. when the exercise price is lower. a) more; more b) more; less c) less; more d) less; less e) The question cannot be answered without knowing the underlying stock price

c) less; more

On the last day of July, a January cycle stock option will have the following expiration months listed: a) July, August, September, October b) July, August, October, January c) August, September, October, November d) August, September, October, January

d) August, September, October, January

Consider a straddle using a put and a call on google stock. All else being equal, an increase in Google's stock volatility will ............. the straddle's lower break even stock price and ............ the straddles higher break even stock price. a) Increase; Increase b) Increase; decrease c) Decrease; decrease d) Decrease; increase e) Not change; not change

d) Decrease; increase

A European put with a strike price of $40 has a premium of $14. The underlying stock price is $25. There are no dividends paid on the stock. It must be that: a) The intrinsic value is $14 b) The intrinsic value is $26 c) The put is overvalued d) The time value is $-1 e) None of the above can be true

d) The time value is $-1

The early exercise price premium for an American call option equals: a) its Intrinsic Value b) its Time Value c) its Market Price d) the Difference between its price and the price of an otherwise similar European option e) None of the above

d) the Difference between its price and the price of an otherwise similar European option

All of the following factors affect the price of a stock option except: a) the risk-free rate b) the riskiness of the stock c) the time to expiration d) the expected rate of return on the stock

d) the expected rate of return on the stock

The Maximum loss a writer of a put option can suffer is equal to? a)the Put Premium b) the Strike Price C) the stock price minus the put premium d) the strike price minus the put premium e) none of the above

d) the strike price minus the put premium

Suppose you purchase one GE May 90 Call contract at $9 and write one GE May 100 Call Contract at $5. If, at expiration, the price of a share of GE stock is $98, your profit would be: a) -$400 b) -$200 c) zero d) $200 e) $400

e) $400

Exchange traded stock options expire: a) On the first day of the expiration month b) On the last day of the expiration month c) On the 15th day of the expiration month d) On the first Monday of the expiration month e) On the third friday of the expiration month

e) On the third friday of the expiration month

An asset that replicates (copies) the cash flows of another asset or portfolio of assets is referred to as a(n) a) innovative asset b) primitive asset c) contingent asset d) diversified asset e) redundant asset

e) redundant asset