Fin 323 - Ch. 20

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? Select one: $10.00 $12.12 $16.00 $11.97 $14.13

$11.97 -Put call parity

You purchase one IBM March $200 put contract (100 stocks per contract) for a put premium of $6. What is the maximum profit that you could gain from this strategy? Select one: $20,000 $20,600 $19,400 $19,000

$19,400

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is Select one: $200. $300. zero. $500.

$300: -$5 + $2 = -$3 × 100 = -$300.

You write one AT&T February $50 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? Select one: $50 $55 $45 $40

$45

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? Select one: $4.38 $5.60 $6.23 $12.26 None of the options

$6.23 -Solve for C in put call parity

You write one JNJ February $70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? Select one: $65 $75 $5 $70

$65

The put-call parity theorem Select one: represents the proper relationship between put and call prices. allows for arbitrage opportunities if violated. may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. All of the options None of the options

All of the options

Suppose you purchase one WFM May $100 call contract at $5 and write one WFM May $105 call contract at $2. The maximum potential profit of your strategy is ________ if both options are exercised. Select one: $600 $500 $200 $300 $100

Call is exercised: -100 (buy stock) -5 (pay premium) = -$105 Write one-Put is exercised: +105 (sell stock) + 2 (get premium) = +$107 $2 profit * 100 shares per contract = $200

A protective put strategy is Select one: a long put plus a long position in the underlying asset. a long put plus a long call on the same underlying asset. a long call plus a short put on the same underlying asset. a long put plus a short call on the same underlying asset. None of the options

a long put plus a long position in the underlying asset.

An American call option can be exercised Select one: any time on or before the expiration date. only on the expiration date. any time in the indefinite future. only after dividends are paid. None of the options

any time on or before the expiration date.

An American call option allows the buyer to Select one: sell the underlying asset at the exercise price on or before the expiration date. buy the underlying asset at the exercise price on or before the expiration date. sell the option in the open market prior to expiration. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. 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.

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.

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 ________. Select one: increase; increase decrease; increase increase; decrease decrease; decrease Cannot tell without further information

decrease; decrease

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share Select one: increases to $504. decreases to $490. increases to $506. decreases to $496. None of the options

increases to $506.

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 Select one: is out of the money. is in the money. sells for a higher price than if the market price of AT&T stock is $40. is out of the money and sells for a higher price than if the market price of AT&T stock is $40. is in the money and sells for a higher price than if the market price of AT&T stock is $40.

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 Disney stock is $60. If a call option on this stock has a strike price of $65, the call Select one: is out of the money. is in the money. can be exercised profitably. is out of the money and can be exercised profitably. is in the money and can be exercised profitably.

is out of the money.

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher. Select one: more; more more; less less; more less; less It doesn't matter—they are too risky to be included in a reasonable person's portfolio.

more; less The holder of the put would prefer to sell the asset to the writer at a higher exercise price. The holder of the call would prefer to buy the asset from the writer at a lower exercise price.

A European call option can be exercised Select one: any time in the future. only on the expiration date. if the price of the underlying asset declines below the exercise price. immediately after dividends are paid.

only on the expiration date.

The price that the buyer of a call option pays to acquire the option is called the Select one: strike price exercise price. execution price. acquisition price. premium.

premium.

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the Select one: strike price exercise price. execution price. strike price or exercise price. strike price or execution price.

strike price or exercise price.

Before expiration, the time value of a call option is equal to Select one: zero. the actual call price minus the intrinsic value of the call. the intrinsic value of the call. the actual call price plus the intrinsic value of the call.

the actual call price minus the intrinsic value of the call: The option's time value is the difference between the option's price and the value of the option were the option expiring immediately.

Suppose you purchase one WFM May $100 call contract at $5 and write one WFM May $105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be Select one: $500. $300. zero. $200.

zero - $103 - $100 = $3 - ($5 - $2) = 0; $0 × 100 = $0.