Finance 381 Exam
A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ______ and a time value of _____. $3.50; $0 $5; $3.50 $3.50; $5 $0; $3.50
$0; $3.50
Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance 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 _________. $150 $400 $600 $1,850
$150
A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option with the same exercise price?
$2.05
You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment. $200 profit $200 loss $300 profit $300 loss
$200 loss
You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be ____________. $2.25 $3.91 $4.05 $5.52
$3.91
The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's stock is 40%. You want to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now. Based on the Black-Scholes OPM, the call option's delta will be __________. 0.28 0.31 0.62 0.70
0.31
Value of a Call Option at Expiration C1 = C0=
C1 = value of call at expiration C0= call premium today
Which options are cheaper? (American or European)
European
The _______________ regulates options on stocks and stock indexes.
The Securities Exchange Commission (SEC)
If an option is out of the money at expiration it will be ____________
Worthless
Options are a ______________ game that transfers gains and losses between option buyers and writers that occur as the price of the underlying asset changes.
Zero-Sum
Hedge ratios for long calls are always __________. between −1 and 0 between 0 and 1 1 greater than 1
between 0 and 1
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. long straddle naked put protective put short stroll
protective put
A Time Spread
refers to the sale and purchase of options with differing expiration dates.
An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor? $24.15 $25 $25.87 $27.86
$24.15 Break Even = 25 - 0.85 = 24.15
A put option that expires in six months with an exercise price of $65 sells for $4.89. The stock is currently priced at $61, and the risk-free rate is 3.6 percent per year, compounded continuously. What is the price of a call option with the same exercise price?
$5.54
Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. 1 10 100 1,000
100
All else equal, call option values are _____ if the _____ is lower. higher; stock price higher; exercise price lower; dividend payout higher; lower volatility
higher; exercise price
Intrinsic value of call option (IV) = value if exercised immediately
value if exercised immediately
The stock price of Apax Inc. is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth __________ today. $11.59 $15 $20 $40
$11.59
Normal Contract Periods are:
1 month 2 months 3 months 6 months 9 months sometimes 1 year
______ option can only be exercised on the expiration date. A Mexican An Asian An American A European
A European
American vs. European options
American Options: can be exercised at any date after purchase European option the option can only be exercised immediately before expiration (only on the last Friday before expiration) The type of Option (American/European) has nothing to do with where they are traded
A listed call option is a contract giving the holder the right to ________ (BUY/SELL ) ____________# of shares of stock at a preset price called the exercise or strike price
BUY 100 SHARES
Exercise prices are adjusted for stock splits and stock dividends, but not ______________
Cash Dividends
The ___________________ is the main regulator of futures contracts and options on futures contracts.
Commodity Futures Trade Commission (CFTC) The CFTC seeks to eliminate trading abuses and prevent market manipulation.
What does the CFTC stand for?
Commodity Futures Trade Commission (CFTC) The CFTC seeks to eliminate trading abuses and prevent market manipulation.
A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise price B. buying two options that have the same expiration dates but different strike prices C. selling two options that have the same expiration dates but different strike prices D. selling an option with one expiration date and buying a similar option with a different expiration date
D. selling an option with one expiration date and buying a similar option with a different expiration date
The OCC stands for...
Option Clearing Corporation (OCC)
Contracts expire on the ___________ following the __________ Friday of the expiration month. ___________ is the last day you can exercise.
Saturday following the third Friday Friday is the last day you can exercise
Predetermined price at which the shares of stock will be exchanged if the option is exercised is called the ____________
Strike Price
Options are ___________ assets, their time value erodes as expiration approaches.
Wasting Assets
A spread
a combination of two or more call options (or two or more puts) on the same stock with differing exercise prices or times to expiration. Some options are bought, while others are sold, or written.
A collar
an options strategy that brackets the value of a portfolio between two bounds. Suppose that an investor currently is holding a large position in Eagle Corp., which is currently selling at $70 per share. A lower bound of $60 can be placed on the value of the portfolio by buying a protective put with exercise price $60. This protection, however, requires that the investor pay the put premium. To raise the money to pay for the put, the investor might write a call option, say, with exercise price $80. The call might sell for roughly the same price as the put, meaning that the net outlay for the two options positions is approximately zero. Writing the call limits the portfolio's upside potential. Even if the stock price moves above $80, the investor will do no better than $80, because at a higher price the stock will be called away. Thus the investor obtains the downside protection represented by the exercise price of the put by selling her claim to any upside potential beyond the exercise price of the call.
What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?
continuous compounding
The current stock price of National Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National Paper's stock is 25%. You want to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now.Using the Black-Scholes OPM, the call option should be worth __________ today. $2.50 $2.94 $3.26 $3.50
$3.26
You sell one MBI July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when MBI stock sells for $95 per share. You will realize a ______ on this strip. $300 profit $100 loss $500 profit $200 profit
$500 profit Premium Received = (4 + 2 * 3)*100 = $ 1000 Buyer of Call option will exercise the option and thus, for seller Loss on Option = (95 - 90) * 100 = $ 500 Net Income/Loss = Premium Received - Loss on option = $ 1000 - $ 500 =$ 500
You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________. $125 $450 $575 unlimited
$575
You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______. −$15 $200 $85 $185
$85 Initial cost = -$68 + $53 = -$15 Profit = +$100 - $0 - $15 = $85
In the Black-Scholes model, if an option is not likely to be exercised, both N(d1) and N(d2) will be close to ______. If the option is definitely likely to be exercised, N(d1)and N(d2) will be close to ______. 1; 0 0; 1 −1; 1 1; −1
0; 1
The Black-Scholes hedge ratio for a long put option is equal to __________. N(d1) N(d2) N(d1) − 1 N(d2) − 1
N(d1) − 1
For Call options: When the strike price is higher than the stock price, you are ___________________ (in the money/out of the money)
Out of the money
The cost of an option is called the ___________ and it is a small percentage of the cost of the underlying asset.
Premium
You find the option prices for three June call options on the same stock. The 95 call has an implied volatility of 25%, the 100 call has an implied volatility of 25%, and the 105 call has an implied volatility of 30%. If you believe this represents a mispricing situation. you may want to ____________________________. buy the 105 call and write the 100 call buy the 105 call and write the 95 call buy either the 95 or the 100 call and write the 105 call write the 105 call and write either the 95 or the 100 call
buy either the 95 or the 100 call and write the 105 call
The hedge ratio is often called the option's _______. delta gamma theta beta
delta
A long straddle
established by buying both a call and a put on a stock, each with the same exercise price, X, and the same expiration date, T Straddles are useful strategies for investors who believe a stock will move a lot in price but are uncertain about the direction of the move.
An American call option gives the buyer 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. sell the underlying asset at the exercise price on or before the expiration date
If a call option holder wishes to purchase the stock, he or she will exercise the option. The option holder must pay the ___________ to the option writer.
Exercise Price
For Call options: When the strike price is lower than the stock price, you are ___________________ (in the money/out of the money)
In the money
A Put option is in-the-money when the stock price is _________ than the strike price
Less
An option with a longer time until expiration will be __________ (more/less) expensive than an option with a shorter time until expiration.
More like insurance, you need to pay more the longer the time. As time passes, the option loses value (Time Decay)
The Black-Scholes hedge ratio for a long call option is equal to ____
N(D1)
Value of a Call Option at Expiration S1 = stock price ____________ S0= stock price ____________
S1 = stock price at expiration S0= stock price today
A listed put option is a contract giving the holder the right to _______ (BUY/SELL ) ________ # shares of stock at a preset price
SELL 100 SHARES
According to the Black-Scholes option-pricing model, two options on the same stock but with different exercise prices should always have the same _________________. price expected return implied volatility maximum loss
implied volatility
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. at the money in the money out of the money knocked in
in the money
For Put options: When the strike price is higher than the stock price, you are ___________________ (in the money/out of the money)
in the money
Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will ______ and the value of investor B's position will _______. increase; increase increase; decrease decrease; increase decrease; decrease
increase; decrease
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. intrinsic value time value stated value discounted value
intrinsic value
A Money Spread
involves the purchase of one option and the simultaneous sale of another with a different exercise price.
What combination of puts and calls can simulate a long stock investment? long call and short put long call and long put short call and short put short call and long put
long call and short put
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 _________. time spread long straddle short straddle money spread
long straddle
At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. max (0, ST − X) min (0, ST − X) max (0, X − ST) min (0, X − ST)
max (0, X − ST)
For Put options: When the strike price is Lower than the stock price, you are ___________________ (in the money/out of the money)
out of the money
The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called _________. trading on gamma index optioning portfolio insurance index arbitrage
portfolio insurance
Before expiration, the time value of an out-of-the-money stock option is __________. equal to the stock price minus the exercise price equal to zero negative positive
positive
What combination of variables is likely to lead to the lowest time value?
short time to expiration and low volatility
Strips and straps are variations of __________. straddles collars money spreads time spreads
straddles
A covered call position
the purchase of a share of stock with the simultaneous sale of a call option on that stock. The written option is "covered" because the potential obligation to deliver the stock can be satisfied using the stock held in the portfolio. Writing an option without an offsetting stock position is called by contrast naked option writing.
Exchange-traded stock options expire on the _______________ of the expiration month. second Monday third Wednesday second Thursday third Friday
third Friday
You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50? ½ share of stock and $25 in bills 1 share of stock and $50 in bills ½ share of stock and $26.19 in bills 1 share of stock and $25 in bills
½ share of stock and $26.19 in bills
You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option? −1 −0.5 0.5 1
−0.5
