Hur - FINC 414 Test 3

A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and the maximum per share gain to the writer of an uncovered call is __________. A)$33.00, $3.50 B)$33.00, $31.50 C)$35.00, $3.50 D)$35.00, $35.00

A

A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put option will want the value of the underlying asset to __________. A) decrease, decrease B) decrease, increase C) increase, decrease D) increase, increase

A

All else the same, an ______ style option will be ______ valuable than a ______ style option. A) American, more, European B) American, less, European C) American, more, Canadian D) American, less, Canadian

A

Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be __________. A) $150 B) $400 C) $600 D) $1,850

A

The ___ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A) Intrinsic value B) Time value C) State value D) None of the above

A

The maximum loss a buyer of a stock call option can suffer is the __________. A) call premium B) stock price C) stock price minus the value of the call D) strike price minus the stock price

A

This is two period American put option with 2 years maturity. Underlying asset price at current time is $100 and u(up factor in the binomial tree) is 1.05 and d(down factor in the binomial tree) is 0.95. The exercise price is $100 and risk free rate is 1%. What is the put option price at current time? A) $2.04 B) $2.58 C) $3.04 D) $3.58 Is the put option in-the-money, at-the-money, or out-of-the money? A) ITM B) ATM C) OTM D) None of the above

A, B

A ___ is an option valuation model predicated on the assumption that stock prices can move to only two values over any short time period. A) Nominal model B) Binomial model C) Time model D) None of the above

B

A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is __________. A) at the money B) in the money C) out of the money D) none of the above

B

A stock option has an intrinsic value of zero if the option is __________. A) in-the-money B) out-of-the money C) both a and b D) neither a nor b

B

If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________. A) decrease, decrease B) decrease, increase C) increase, decrease D) increase, increase

B

An American put option gives its holder the right to __________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date

C

An investor purchases a long call at a price of $2.50. The exercise price is $35.00. If the current stock price is $35.10, what is the break even point for the investor? A) $32.50 B) $35.00 C) $37.50 D) $37.60

C

Each stock option contract provides for the right to buy or sell __________ shares of stock. A) 1 B) 10 C) 100 D) 1,000

C

The ___ is the difference between the actual call price and the intrinsic value. A) State value B) Strike value C) Time value D) None of the above

C

A(n) ______ option can only be exercised on the expiration date. A) Mexican B) Asian C) American D) European

D

The potential loss for a writer of a naked call option on a stock is __________. A) equal to the call premium B) larger the lower the stock price C) limited D) unlimited

D

The value of a call option increases with all of the following except ___________. A) stock price B) time to maturity C) volatility D) exercise price

D

Underlying asset price at current time is $100 and u(up factor in the binomial tree) is 1.05 and d(down factor in the binomial tree) is 0.95. Exercise price is $95 and risk free rate is 0.02%. Assume one-period model. What is the European call option price? A) $1.51 B) $2.51 C) $3.51 D) $5.02

D

Which of the following strategies makes a profit if the sock price declines and loses money when the stock price increases? A) Long call and short put B) Long call and long put C) Short call and short put D) Short call and long put

D

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price. A) negatively, negatively B) negatively, positively C) positively, negatively D) positively, positively

B

Which of the following explanation is consistent with a long put strategy? A) The investor expects the price to increase B) Stable prices are anticipated C) The investor expects the price of the stock to decrease. D) The investor has a long term investment horizon

C

Which of the following strategies makes a profit if the sock price stays stable? A) Long call and short put B) Long call and long put C) Short call and short put D) Short call and long put

C

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a __________. A) long stradddle B) naked put C) protective put D) short stroll

C

The value of a put option increases with all of the following except ___________. A) stock price B) time to maturity C) volatility D) All of the above

A

The writer of a put option ________________. A) agrees to sell shares at a set price B) agrees to buy shares at a set price C) acquires the opportunity to buy shares at a set price D) acquires the opportunity to sell shares at a set price

B

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a __________. A) horizontal spread B) long straddle C) short straddle D) vertical spread

B

The delta of an option is __________. A) the change in the value of an option for a dollar change in the price of the underlying asset B) the change in the value of the underlying asset for a dollar change in the call price C) the percentage change in the value of an option for a one percent change in the value of the underlying asset D) the percentage change in the value of the underlying asset for a one percent change in the value of the call

A

This is two period American put option with 2 years maturity. Underlying asset price at current time is $100 and u(up factor in the binomial tree) is 1.05 and d(down factor in the binomial tree) is 0.95. The exercise price is $100 and risk free rate is 1%. What is the time value of the put option at current time? A) $2.04 B) $2.58 C) $3.04 D) $3.58

A

What combination of puts and calls can simulate a long stock investment? A) Long call and short put B) Long call and long put C) Short call and short put D) Short call and long put

A

What is the break-even stock price of the protective put? P is the put option premium you paid. A) S₀ + P B) S∨T - P C) X - P D) X - S₀

A

Which of the following explanation is consistent with a long call strategy? A) The investor expects the price to increase B) Stable prices are anticipated C) The investor expects the price of the stock to decrease. D) The investor has a long term investment horizon

A

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by __________________. A) shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with same exercise price B) buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with same exercise price C) buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with same exercise price D) None of the above

B

You buy one Chrysler August 50 call contract and one Chrysler August 50 put contract. The call premium is $4.25 and the put premium is $5.00. Your highest potential loss from this position is __________. A) $75 B) $925 C) $5,000 D) unlimited

B

Underlying asset price at current time is $100 and u(up factor in the binomial tree) is 1.05 and d(down factor in the binomial tree) is 0.95. Exercise price is $95 and risk free rate is 0.02%. Assume one-period model. What is the intrinsic value of the above call option? A) $0 B) $1 C) $2 D) $5

D

Which strategy produces the following payoff? (The cost is not considered in the payoff graph, i.e. the premium paid upfront is not considered) DOUBLE BUTTERFLY A) Short { one Call with 2X , two Calls with 4X, one Call with 5X } Long { two Calls with X, two Calls with 3X } B) Short { two Calls with X, two Calls with 3X} Long { one Call with 2X , two Calls with 4X, one Call with 5X } C) Short { one Call with X , two Calls with 3X, one Call with 5X) Long { two Calls with 2X, two Calls with 4X } D) Short { two Calls with 2X, two Calls with 4X} Long { one Call with X , two Calls with 3X, one Call with 5X }

D

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a __________. A) covered call B) long straddle C) naked call D) vertical spread

A