# Quiz 22: Option Contracts

Anthropology

Q 1Q 1

Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-The Chicago Board Options Exchange has the largest share of stock option trading.

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True False

True

Q 2Q 2

Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Index options are settled by delivery of the stocks that make up the index.

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True False

False

Q 3Q 3

Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-In index options, the aggregate market takes the place of the individual stock issues being traded, as in stock options.

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True False

True

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True False

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True False

Q 6Q 6

There is an inverse relationship between the market interest rate and the value of a call option.

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True False

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True False

Q 8Q 8

The standardization of option contracts and the creation of the Options Clearing Corporation are two important results of the opening of the Chicago Board of Options Exchange.

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True False

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True False

Q 10Q 10

A price spread (or vertical spread) involves buying and selling an option for the same stock and expiration date but with different exercise prices.

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True False

Q 11Q 11

A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond.

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True False

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True False

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True False

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True False

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True False

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True False

Q 17Q 17

It is a violation of the securities laws to combine option contracts to achieve a customized payoff.

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True False

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True False

Q 19Q 19

The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.

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True False

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True False

Q 21Q 21

The underlying stock price and the value of the put option are factors that impact the value of an American call option.

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True False

Q 22Q 22

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

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True False

Q 23Q 23

Investors should purchase market index put options if they anticipate an increase in the index value.

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True False

Q 24Q 24

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

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True False

Q 25Q 25

It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.

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True False

Q 26Q 26

The most important input the investor must provide in determining option values is the strike price.

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True False

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True False

Q 28Q 28

In a binomial option pricing model the initial value of the call can be determined by working backward through the tree and solving for each of the remaining intermediate option values.

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True False

Q 29Q 29

The binomial option pricing model and the Black and Scholes model are similar because they are both discrete models.

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True False

Q 30Q 30

The delta in the Black-Scholes model is simply the slope of a line tangent to the call option price curve.

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True False

Q 31Q 31

The creation of the CBOE led to all the following innovations in options except
A)The creation of a central marketplace.
B)The introduction of a clearing corporation.
C)The standardization of expiration dates.
D)The creation of a primary market.
E)The creation of a secondary market.

Free

Multiple Choice

Q 32Q 32

A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
A)The same expiration date but different exercise prices.
B)The same exercise price but different expiration dates.
C)Different exercise prices and different expiration dates.
D)The same exercise price and the same expiration month.
E)Traded in different markets.

Free

Multiple Choice

Q 33Q 33

In a money spread, an investor would
A)Buy two in-the-money call options on the same stock with different exercise dates.
B)Buy two out-of-the-money call options on the same stock with different exercise dates.
C)Sell two in-the-money call options on the same stock with different exercise dates.
D)Sell an out-of-the-money call and purchase an in-the-money call on the same stock with the same exercise date.
E)Sell two out-of-the-money call options on the same stock with different exercise dates.

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Multiple Choice

Q 34Q 34

A money spread involves buying and selling call options in the same stock with
A)The same time period and exercise price.
B)The same time period but different exercise price.
C)A different time period but same exercise price.
D)A different time period and different exercise price.
E)Options in different markets.

Free

Multiple Choice

Q 35Q 35

If you were to purchase an October option with an exercise price of 50 for 8 and simultaneously sell an October option with an exercise price of 60 for 2, you would be
A)Bullish and taking a high risk.
B)Bullish and conservative.
C)Bearish and taking a high risk.
D)Bearish and conservative.
E)Neutral.

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Multiple Choice

Q 36Q 36

You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit but you are troubled about the short run behavior of the stock market. An effective action on your part would be to
A)Purchase a put.
B)Purchase a call.
C)Purchase an index option.
D)Utilize a bearish spread.
E)Utilize a bullish spread.

Free

Multiple Choice

Q 37Q 37

If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October option with an exercise price of 60 for $2, you would be
A)Bullish and taking a high risk.
B)Bullish and conservative.
C)Bearish and taking a high risk.
D)Bearish and conservative.
E)Neutral.

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Multiple Choice

Q 38Q 38

A vertical spread involves buying and selling call options in the same stock with
A)The same time period and price.
B)The same time period but different price.
C)A different time period but same price.
D)A different time period and different price.
E)Options in different markets.

Free

Multiple Choice

Q 39Q 39

Which of the following is not a factor needed to calculate the value of an American call option?
A)The stock price
B)The exercise price
C)The exchange on which the option is listed
D)The volatility of the underlying stock
E)The interest rate

Free

Multiple Choice

Q 40Q 40

Buying a bear spread is equivalent to
A)Selling a bull spread.
B)Buying an out-of-the-money call and selling an in-the-money call on the same stock with the same exercise date.
C)Selling an out-of-the-money call and buying an in-the-money call on the same stock with a different exercise price.
D)Choices a and b only.
E)None of the above

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Multiple Choice

Q 41Q 41

A currency call is like being ____ in the currency futures.
A)Out-of-the-money
B)In-the-money
C)Long
D)Short
E)At-the-money

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Multiple Choice

Q 42Q 42

In the Black-Scholes option pricing model, an increase in security price (S) will cause
A)An increase in call value and an increase in put value
B)An increase in call value and a decrease in put value
C)A decrease in call value and an increase in put value
D)A decrease in call value and a decrease in put value
E)An increase in call value and an increase or decrease in put value

Free

Multiple Choice

Q 43Q 43

In the Black-Scholes option pricing model, an increase in exercise price (X) will cause
A)An increase in call value and an increase in put value
B)An increase in call value and a decrease in put value
C)A decrease in call value and an increase in put value
D)A decrease in call value and a decrease in put value
E)An increase in call value and an increase or decrease in put value

Free

Multiple Choice

Q 44Q 44

In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause
A)An increase in call value and an increase in put value
B)An increase in call value and a decrease in put value
C)A decrease in call value and an increase in put value
D)A decrease in call value and a decrease in put value
E)An increase in call value and an increase or decrease in put value

Free

Multiple Choice

Q 45Q 45

In the Black-Scholes option pricing model, an increase in the risk free rate (RFR) will cause
A)An increase in call value and an increase in put value
B)An increase in call value and a decrease in put value
C)A decrease in call value and an increase in put value
D)A decrease in call value and a decrease in put value
E)An increase in call value and an increase or decrease in put value

Free

Multiple Choice

Q 46Q 46

In the Black-Scholes option pricing model, an increase in security volatility () will cause
A)An increase in call value and an increase in put value
B)An increase in call value and a decrease in put value
C)A decrease in call value and an increase in put value
D)A decrease in call value and a decrease in put value
E)An increase in call value and an increase or decrease in put value

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Multiple Choice

Q 47Q 47

The value of a call option is positively related to:
A)Underlying stock price.
B)Time to expiration
C)Exercise price.
D)a and b
E)b and c

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Multiple Choice

Q 48Q 48

The value of a call option is inversely related to:
A)Underlying stock price.
B)Time to expiration
C)Exercise price.
D)a and b
E)b and c

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Multiple Choice

Q 49Q 49

If the hedge ratio is 0.50, this indicates that the portfolio should hold
A)Two shares of stock for every call option written.
B)One share of stock for every two call options written.
C)Two shares of stock for every call option purchased.
D)One share of stock for every two call options purchased.
E)Two call options for every put option written.

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Multiple Choice

Q 50Q 50

Options can be used to
A)Modify an equity portfolio's systematic risk.
B)Modify an equity portfolio's unsystematic risk.
C)Manage currency exposures in international equity portfolios.
D)Change a portfolio's exposure to a particular asset
E)All of the above

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Multiple Choice

Q 51Q 51

The Black-Scholes model assumes that stock price movements can be described by
A)Geometric moving averages.
B)Arithmetic moving averages.
C)Regression towards the mean.
D)Geometric Brownian motion.
E)Stochastic time lags.

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Multiple Choice

Q 52Q 52

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?
A)Future security price.
B)Exercise price.
C)Time to expiration.
D)Risk-free rate.
E)Security price volatility.

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Multiple Choice

Q 53Q 53

In the Black-Scholes model N(d

_{1}) represents the A)Hedge ratio. B)Partial derivative of the call's value with respect to the stock price. C)Change in the option's value given a one dollar change in the underlying security's price. D)Option's delta. E)All of the above.Free

Multiple Choice

Q 54Q 54

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as
A)Spider.
B)QQQ.
C)VIX.
D)CIN.
E)VOL.

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Multiple Choice

Q 55Q 55

The entity that acts as the guarantor of each CBOE-traded contract is the
A)Federal government
B)Securities and exchange commission
C)CBOE
D)Options clearing corporation
E)Federal reserve bank

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Multiple Choice

Q 56Q 56

A foreign currency option contract traded on U.S. exchanges allows for the sale or purchase of a set amount of
A)U.S.currency at a floating exchange rate
B)U.S.currency at a fixed exchange rate
C)Foreign currency at a floating exchange rate
D)Foreign currency at a fixed exchange rate
E)None of the above

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Multiple Choice

Q 57Q 57

Options on futures contracts are very popular because
A)They require the holder to purchase at a future date
B)Of their ability to create leverage
C)The seller of the futures contract is under no obligation
D)The amount of the underlying commodity is negotiable
E)None of the above

Free

Multiple Choice

Q 58Q 58

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. How much must an investor pay for one call option contract?
A)$680
B)$815
C)$625
D)$590
E)$340

Free

Multiple Choice

Q 59Q 59

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. How much must an investor pay for one put option contract?
A)$680
B)$815
C)$340
D)$625
E)$590

Free

Multiple Choice

Q 60Q 60

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?
A)$0
B)$3750 gain
C)$3660 gain
D)$4650 loss
E)$2680 loss

Free

Multiple Choice

Q 61Q 61

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. If the spot rate at expiration is $0.80 and the call option was purchased, what is the dollar gain or loss?
A)$123 gain
B)$590 loss
C)$312 gain
D)$237 gain
E)$0

Free

Multiple Choice

Q 62Q 62

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. If the spot rate at expiration is $0.85 and the put option was purchased, what is the dollar gain or loss?
A)$340 loss
B)$125 gain
C)$750 gain
D)$750 loss
E)$200 loss

Free

Multiple Choice

Q 63Q 63

Exhibit 22.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.1. If the spot rate at expiration is $0.75 and the put option was purchased, what is the dollar gain or loss?
A)$0
B)$200 loss
C)$200 gain
D)$3160 gain
E)$1187 loss

Free

Multiple Choice

Q 64Q 64

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$18.75 loss
B)$18.75 gain
C)$1,668.75 gain
D)$1,668.75 loss
E)$1,687.50 loss

Free

Multiple Choice

Q 65Q 65

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$1,687.50 loss
B)$3,362.50 loss
C)$3,675.50 gain
D)$13.00 gain
E)$13.00 loss

Free

Multiple Choice

Q 66Q 66

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strip using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$1,668.75 gain
B)$1,700.00 gain
C)$1,700.00 loss
D)$31.25 gain
E)$31.25 loss

Free

Multiple Choice

Q 67Q 67

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$68.75 loss
B)$68.75 gain
C)$37.50 loss
D)$1,200.00 loss
E)$1,200.00 gain

Free

Multiple Choice

Q 68Q 68

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$37.50 loss
B)$37.50 gain
C)$100.00 loss
D)$100.00 gain
E)$2,437.50 loss

Free

Multiple Choice

Q 69Q 69

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$106.25 gain
B)$106.25 loss
C)$1,275.00 loss
D)$1,275.00 gain
E)$75.00 loss

Free

Multiple Choice

Q 70Q 70

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$668.75 gain
B)$668.75 loss
C)$94.56 gain
D)$94.56 loss
E)$81.25 loss

Free

Multiple Choice

Q 71Q 71

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$81.25 loss
B)$1,606.25 gain
C)$1,606.25 loss
D)$268.75 loss
E)$268.75 gain

Free

Multiple Choice

Q 72Q 72

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If you establish a long strip using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A)$256.25 loss
B)$256.25 gain
C)$925.00 loss
D)$668.75 gain
E)$668.75 loss

Free

Multiple Choice

Q 73Q 73

Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 22.2. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?
A)$912.50 loss
B)$87.50 gain
C)$87.50 loss
D)$1,000.00 gain
E)$1,000.00 loss

Free

Multiple Choice

Q 74Q 74

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Refer to Exhibit 22.3. Use the Black-Scholes option pricing model to calculate the price of a call option.
A)$5.19
B)$4.35
C)$3.93
D)$6.19
E)$8.17

Free

Multiple Choice

Q 75Q 75

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Refer to Exhibit 22.3. Calculate the price of the put option.
A)$1.086
B)$0.862
C)$6.234
D)$0.623
E)$2.317

Free

Multiple Choice

Q 76Q 76

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $65.
A)$71.75
B)$76.75
C)$58.25
D)$81.75
E)None of the above

Free

Multiple Choice

Q 77Q 77

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $80.
A)$81.75
B)$73.25
C)$86.75
D)$76.75
E)None of the above

Free

Multiple Choice

Q 78Q 78

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase the stock if the price after 35 days is $70.
A)$77.75
B)$87.25
C)$82.25
D)$72.75
E)None of the above

Free

Multiple Choice

Q 79Q 79

Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase the stock if the price after 35 days is $85.
A)$77.75
B)$87.25
C)$82.25
D)$72.75
E)None of the above.

Free

Multiple Choice

Q 80Q 80

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. Calculate the net value of a protective put position at a stock price at expiration of $20, and a stock price at expiration of $45.
A)$6.35, $18.85
B)$29.65, $42.15
C)$21.65, $34.15
D)$8, $8
E)$8, $8

Free

Multiple Choice

Q 81Q 81

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. A protective put is an appropriate strategy if
A)An investor wishes to generate additional income.
B)An investor wished to insure against a decline in share values.
C)An investor expected share prices to be volatile.
D)An investor expected share prices to remain in a trading range.
E)An investor expected share prices to be volatile, but was inclined to be bullish.

Free

Multiple Choice

Q 82Q 82

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. Calculate the net value of a covered call position at a stock price at expiration of $20, and a stock price at expiration of $45.
A)$6.35, $18.85
B)$29.65, $42.15
C)$21.65, $34.15
D)$8, $8
E)$8, $8

Free

Multiple Choice

Q 83Q 83

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. A covered call is an appropriate strategy if
A)An investor wishes to generate additional income.
B)An investor wished to insure against a decline in share values.
C)An investor expected share prices to be volatile.
D)An investor expected share prices to remain in a trading range.
E)An investor expected share prices to be volatile, but was inclined to be bullish.

Free

Multiple Choice

Q 84Q 84

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
A)$6.35, $18.85
B)$29.65, $42.15
C)$21.65, $34.15
D)$8, $8
E)$8, $8

Free

Multiple Choice

Q 85Q 85

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. A long straddle is an appropriate strategy if
A)An investor wishes to generate additional income.
B)An investor wished to insure against a decline in share values.
C)An investor expected share prices to be volatile.
D)An investor expected share prices to remain in a trading range.
E)An investor expected share prices to be volatile, but was inclined to be bullish.

Free

Multiple Choice

Q 86Q 86

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
A)$6.35, $18.85
B)$29.65, $42.15
C)$21.65, $34.15
D)$8, $8
E)$8, $8

Free

Multiple Choice

Q 87Q 87

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. A short straddle is an appropriate strategy if
A)An investor wishes to generate additional income.
B)An investor wished to insure against a decline in share values.
C)An investor expected share prices to be volatile.
D)An investor expected share prices to remain in a trading range.
E)An investor expected share prices to be volatile, but was inclined to be bullish.

Free

Multiple Choice

Q 88Q 88

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. Calculate the payoffs of a long strap at a stock price at expiration of $20 and a stock price at expiration of $45.
A)$6.35, $18.85
B)$29.65, $42.15
C)$21.65, $34.15
D)$8, $8
E)$8, $8

Free

Multiple Choice

Q 89Q 89

Exhibit 22.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
-Refer to Exhibit 22.4. A long strap is an appropriate strategy if
A)An investor wishes to generate additional income.
B)An investor wished to insure against a decline in share values.
C)An investor expected share prices to be volatile.
D)An investor expected share prices to remain in a trading range.
E)An investor expected share prices to be volatile, but was inclined to be bullish.

Free

Multiple Choice

Q 90Q 90

Exhibit 22.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 22.5. Calculate the possible prices of the stock one year from today.
A)$37.50 or $17.50.
B)$62.50 or $37.50.
C)$62.50 or $17.50.
D)$50 or $45.
E)None of the above.

Free

Multiple Choice

Q 91Q 91

Exhibit 22.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 22.5. Estimate n, the number of call options that must be written.
A)1.4286
B)2.9286
C)2.8571
D)2.5714
E)1.1111

Free

Multiple Choice

Q 92Q 92

Exhibit 22.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 22.5. Calculate the price of the call option today (C

_{0}). A)$7.56 B)$17.48 C)$9.26 D)$5.0 E)$17.15Free

Multiple Choice

Q 93Q 93

Exhibit 22.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 22.6. Calculate the possible prices of the stock at the end of one year.
A)$69, $51, $79.35
B)$51, $79.35, $58.65
C)$79.35, $58.65, $43.35
D)$58.65, $43.35, $14.35
E)None of the above

Free

Multiple Choice

Q 94Q 94

Exhibit 22.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 22.6. Calculate the price of the call option after the stock price has already moved up in value once (C

_{u}). A)$7.77 B)$14.35 C)$0 D)$4.21 E)$6.44Free

Multiple Choice

Q 95Q 95

Exhibit 22.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 22.6. Calculate the price of the call option after the stock price has already moved down in value once (C

_{d}). A)$7.77 B)$14.35 C)$0 D)$4.21 E)$6.44Free

Multiple Choice

Q 96Q 96

Exhibit 22.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 22.6. Calculate the price of the call option today (C

_{0}). A)$7.77 B)$14.35 C)$0 D)$4.21 E)$6.44Free

Multiple Choice

Q 97Q 97

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. What would the net value of a protective put position be if the stock price at expiration is $35?
A)$3.10
B)$30.15
C)$32.10
D)$34.05
E)$35.00

Free

Multiple Choice

Q 98Q 98

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. What would the net value of a covered call position be if the stock price at expiration is $35?
A)$29.00
B)$30.65
C)$33.55
D)$36.00
E)$36.65

Free

Multiple Choice

Q 99Q 99

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. What would the net value of a long straddle position be if the stock price at expiration is $35?
A)7.15
B)$1.15
C)$1.15
D)$7.15
E)$36.15

Free

Multiple Choice

Q 100Q 100

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. What would the net value of a short straddle position be if the stock price at expiration is $35?
A)36.15
B)7.15
C)$1.15
D)$1.15
E)$7.15

Free

Multiple Choice

Q 101Q 101

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. What would the net value of a long strap position be if the stock price at expiration is $35?
A)$1.15
B)$2.30
C)$1.15
D)$2.30
E)$5.20

Free

Multiple Choice

Q 102Q 102

Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7. Which strategy is most appropriate for an investor who expects share prices to be volatile, but was inclined to be bullish?
A)protective put
B)covered call
C)long straddle
D)short straddle
E)long strap

Free

Multiple Choice

Q 103Q 103

Exhibit 22.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock
-Refer to Exhibit 22.8. Calculate the net value of a protective put position at an expiration stock price of $20.
A)$2.85
B)$17.15
C)$19.85
D)$21.65
E)$22.85

Free

Multiple Choice

Q 104Q 104

Exhibit 22.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock
-Refer to Exhibit 22.8. Calculate the net value of a covered call position at an expiration stock price of $20.
A)$1.85
B)$4.45
C)$18.15
D)$21.85
E)$24.35

Free

Multiple Choice

Q 105Q 105

Exhibit 22.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock
-Refer to Exhibit 22.8. Calculate the payoff of a long straddle at an expiration stock price of $20.
A)$4.50
B)$2.00
C)$2.00
D)$4.50
E)$20.50

Free

Multiple Choice

Q 106Q 106

Exhibit 22.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock
-Refer to Exhibit 22.8. Calculate the payoff of a short straddle at an expiration stock price of $20.
A)$4.50
B)$2.00
C)$2.00
D)$4.50
E)$20.50

Free

Multiple Choice