put buyercall buyercall writer put writer 2 points question 20tony lee purchases 200 shares B u s i n e s s F i n a n c e

QUESTION 1

1. David Smith purchased 1 NHK Oct 60 Call @4.  What is his maximum potential loss?

   $5,600

   $5,800

   It is unlimited

   $400

4 points  

QUESTION 2

1. If the stock price is 41, the exercise price is 40, the put price is 1.54, and the Black-Sholes price of put using 0.30 as the standard deviation is 1.11.  The implied volatility will be ____.

   lower than 0.30

   0.30

   lower than the risk-free rate

   higher than 0.30

2 points  

QUESTION 3

1. If HKK stock is trading at $100 and there is a 5% stock dividend, the holder of a HKK 105 put contract would now have the right to sell:

   105 shares at $100 per share.

   100 shares at $105 per share.

   105 shares at $95.24 per share.

   100 shares at $110.25 per share.

4 points  

QUESTION 4

1. Mary Lu purchased 10 call option contracts at a premium of 4. How much did she pay for them?

   $4,000

   $4

   $40

   $250

4 points  

QUESTION 5

1. Which of the following strategies has essentially the same profit diagram as a covered call?

   long a put

   long a call

   long a covered call

   write a put

2 points  

QUESTION 6

1. Which of the following statements is TRUE about the law of one price?
   I.  The law of one price is violated if the same (identical) good is selling at different prices.
   II. The “one price” that an asset must be is called the “theoretical value.”
   III. A situation involving two identical goods or portfolios that are not priced equivalently would be exploited by arbitrageurs until their prices were equal.

   I, II

   I, II, III

   I, III

   II, III

2 points  

QUESTION 7

1. If interest rates rise, the price of a put option will __ and the price of a call will___.

   decrease, increase

   increase, decrease

   decrease, decrease

   increase, increase

2 points  

QUESTION 8

1. Consider a binomial world in which the current stock price of 100 can either go up by 10 percent or down by 10 percent.  The risk-free rate is 4 percent.  Assume a two-period world.  What is the theoretical value of the American put with an exercise price of 105?

   5.49

   5.00

   4.33

   3.08

4 points  

QUESTION 9

1. On March 2, a Treasury bill expiring on March 21 had a bid discount of 3.61, and an ask discount of 3.59.  What is the best estimate of the risk-free rate for the option contract expires on March 22?

   3.72 %

   3.67%

   3.62%

   3.60%

4 points  

QUESTION 10

1. Consider a binomial world in which the current stock price of 100 can either go up by 10 percent or down by 10 percent.  The risk-free rate is 4 percent.  Assume a two-period world.  What is the theoretical value of the American call with an exercise price of 100?

   9.62

   6.73

   9.51

   9.89

4 points  

QUESTION 11

1. Which of the following are advantages of derivatives?
   I. Lower transaction costs than securities and commodities
   II. Reveal information about expected prices and volatility
   III. Help control risk

   II, III

   I, II

   I, III

   I, II, III

2 points  

QUESTION 12

1. Consider a binomial world in which the current stock price of 100 can either go up by 10 percent or down by 10 percent.  The risk-free rate is 4 percent.  Assume a two-period world.  What is the theoretical value of the European put with an exercise price of 100?

   1.97

   6.15

   2.05

   0.29

4 points  

QUESTION 13

1. If ABC stock is trading at $40 and there is a 2-for-1 stock split, the holder of an ABC 45 put contract would now have the right to sell:

   200 shares at $22.50 per share.

   50 shares at $90 per share.

   200 shares at $20 per share.

   50 shares at $80 per share.

4 points  

QUESTION 14

1. Consider a binomial world in which the current stock price of 100 can either go up by 10 percent or down by 10 percent.  The risk-free rate is 4 percent.  Assume a one-period world.  What is the theoretical value of the European call with an exercise price of 100?

   7.00

   3.00

   6.73

   2.88

4 points  

QUESTION 15

1. A call option gives the holder

   the right but not obligation to sell something

   the right but not obligation to buy something

   the right and obligation to sell something

   the right and obligation to buy something

2 points  

QUESTION 16

1. Which of the following statements about the option price sensitivity is TRUE?
    
   I.  The option’s rate of time value decay is represented by its vega. 
   II. An option’s gamma represents the risk of the delta changing. 
   III. The option’s delta is approximately the change in the option price for a change in the stock price.

   I, III

   II, III

   I, II

   I, II, III

2 points  

QUESTION 17

1. Brian purchases 4 UTV May 35 Call @ 3 and 4 UTV May 35 Put @ 2.  UTV falls to 19.  What has Brian gained or lost?

   He has gained $1,400.

   He has gained $4,400.

   He has lost $2,000.

   He has lost $5,600.

4 points  

QUESTION 18

1. A stock in the March cycle would trade the following options on October 1:

   October, November, March, June

   March, June, September, December

   October, November, December, January

   October, November, December, March

2 points  

QUESTION 19

1. Which of the following investors is obligated to buy stock?

   put buyer

   call buyer

   call writer

   put writer

2 points  

QUESTION 20

1. Tony Lee purchases 200 shares of WCC stock at $59 and purchases 2 WCC Apr 50 Puts @4.25. What is Tony’s breakeven point?

   $59.25

   $55.75

   $45.75

   $63.25

4 points  

QUESTION 21

1. The following quotes were observed for options on a given stock on November 1 of a given year.  These are American calls.  The stock price was 113.25.

                  
    Strike  Nov  Dec  Jan     
     105  8.35  10  11.5     
     110  4.35  7.15  8.25     
     115  1.5  3.75  5.25     
    
   What is the time value of the December 110 call?

   3.75

   3.25

   3.90

   7.15

4 points  

QUESTION 22

1. Which of the following statements is TRUE?
    
   I.  When the number of time periods is large, the binomial price will theoretically equal to the Black-Scholes-Merton price.
   II. The Black-Scholes-Merton model is a continuous-time model.

   I

   Both I and II are true.

   II

   Both I and II are not true.

2 points  

QUESTION 23

1. Which TWO of the following options are in-the-money if BAC is trading at 62 and DEF is trading at 44?
   I. A BAC Oct 60 call option
   II. A BAC Oct 70 call option
   III. A DEF Aug 40 put option
   IV. A DEF Aug 50 put option

   I and III

   II and IV

   I and IV

   II and III

4 points  

QUESTION 24

1. Which of the following statements about the Black-Scholes-Merton model is NOT TRUE?

   The model is consistent with put-call-parity.

   It assumes that there are transaction costs.

   It assumes that the stock volatility does not change throughout the option’s life.

   It assumes that the stock price follows a log-normal distribution.

2 points  

QUESTION 25

1. Suppose you use put-call parity to compute a European put price from the European call price, the stock price, and the risk-free rate.  You find the market price of the put to be less than the price given by put-call parity.  Ignoring transaction costs, what trades should you do?

   buy the call and the risk-free bonds and sell the put and the stock

   buy the stock and the risk-free bonds and sell the put and the call

   buy the put and the stock and sell the risk-free bonds and the call

   buy the put and the call and sell the risk-free bonds and the stock

2 points  

QUESTION 26

1. If a stock’s variance of return increases, the price of a put option will __ and the price of a call will___.

   increase, increase

   decrease, increase

   increase, decrease

   decrease, decrease

2 points  

QUESTION 27

1. An investor who creates a long straddle:

   believes the stock will move drastically, but isn’t sure which way.

   believes the stock will remain relatively stable.

   is bearish on the stock.

   is bullish on the stock.

2 points  

QUESTION 28

1. Which of the following statements is TRUE?
   I.  The binomial model does not assume that investors are risk neutral.
   II. If the binomial is extended to multiple periods for a fixed option life, the up and down factors and the risk-free rate must be increased.

   Both I and II are true.

   I

   Both I and II are not true.

   II

2 points  

QUESTION 29

1. Which of the following statements is TRUE?

   I.  Stocks, bonds, options, and futures are financial assets.
   II. All derivatives are based on the random performance of the “underlying”.  The underlying might be an assets, an item,or another derivative.

   I

   Both I and II are true.

   II

   Both I and II are not true.

2 points  

QUESTION 30

1. Which of the following statements is TRUE?
   I.  The maximum value of a call is the strike price.
   II. The maximum value of a put is the stock price.

   I

   II

   Both I and II are true.

   Both I and II are not true.

2 points  

QUESTION 31

1. Which of the following statements is TRUE?
     I.  A market in which the price equals the true economic value is efficient.
     II. The positive relationship between risk and return is called market efficiency.

   Both I and II are true.

   II

   Both I and II are not true.

   I

2 points  

QUESTION 32

1. Which of the following positions are bullish on the market?
   I. buying a protective put
   II. writing a put
   III. buying a call

   I, II, III

   I, III

   I, II

   II, III

2 points  

QUESTION 33

1. Which of the following statements is TRUE?
   I.  The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as a “repurchase agreement”. 
   II. Short selling is the process of selling a specified asset to the buyer currently and buying it back at a specified time in the future at an agreed future price.

   Both I and II are true.

   I

   II

   Both I and II are not true.

2 points  

QUESTION 34

1. Laura Green purchases 5 XYZ Feb50 Puts @3. What is her maximum profit on the trade?

   $25,000

   $23,500

   $1,500

   Potentially unlimited

4 points  

QUESTION 35

1. A European put option on a stock priced at $50 has a price of $3.  The present value of the exercise price of the option is $49.  The stock is not expected to pay a dividend.  What must be the price of an identical call option on the same stock?

   $1.00

   $4.00

   $2.00

   $3.00

4 points