Derivatives Markets, 3e (McDonald)
Chapter 2 An Introduction to Forwards and Options
2.1 Multiple Choice
Question: The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. What is the profit or loss to a short position if the spot price of the market index rises to $920 by the expiration date?
A) $20 gain
B) $20 loss
C) $10 gain
D) $10 loss
Answer:
Question: The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. The market index rises to $920 by the expiration date. The annual rate of interest on treasuries is 2.4% (0.2% per month). What is the difference in the payoffs between a long index investment and a long forward contract investment? (Assume monthly compounding.)
A) $10.84
B) $24.59
C) $26.40
D) $43.20
Answer:
Question: The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. The annual rate of interest on treasuries is 2.4% (0.2% per month). What annualized rate of interest makes the net payoff zero? (Assume monthly compounding.)
A) 4.8%
B) 8.5%
C) 11.2%
D) 13.2%
Answer:
Question: The spot price of the market index is $900. After 3 months, the market index is priced at $920. An investor has a long call option on the index at a strike price of $930. After 3 months, what is the investor’s profit or loss?
A) $10 loss
B) $0
C) $10 gain
D) $20 gain
Answer:
Question: The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 2.4% (0.2% per month). The premium on the long put, with an exercise price of $930, is $8.00. What is the profit or loss at expiration for the long put?
A) $2.00 gain
B) $2.00 loss
C) $1.95 gain
D) $1.95 loss
Answer:
Question: The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 2.4% (0.2% per month). The premium on the long put, with an exercise price of $930, is $8.00. At what index price does a long put investor have the same payoff as a short index investor? Assume the short position has a breakeven price of $930.
A) $921.90
B) $930.00
C) $938.05
D) $940.00
Answer:
Question: All of the positions listed will benefit from a price decline, except:
A) Short put
B) Long put
C) Short call
D) Short stock
Answer:
Question: The spot price of the market index is $900. The annual rate of interest on treasuries is 2.4% (0.2% per month). After 3 months the market index is priced at $920. An investor has a long call option on the index at a strike price of $930. What profit or loss will the writer of the call option earn if the option premium is $2.00?
A) $2.00 gain
B) $2.00 loss
C) $2.01 gain
D) $2.01 loss
Answer:
Question: The spot price of the market index is $900. After 3 months the market index is priced at $915. The annual rate of interest on treasuries is 2.4% (0.2% per month). The premium on the long put, with an exercise price of $930, is $8.00. Calculate the profit or loss to the short put position if the final index price is $915.
A) $15.00 gain
B) $15.00 loss
C) $6.95 gain
D) $6.95 loss
Answer:
Question: If your homeowner’s insurance premium is $1,000 and your deductible is $2000, what could be considered the strike price of the policy if the home has a value of $120,000?
A) $118,000
B) $120,000
C) $117,000
D) $122,000
Answer:
Question: A put option is purchased and held for 1 year. The Exercise price on the underlying asset is $40. If the current price of the asset is $36.45 and the future value of the original option premium is (-$1.[/cpmembership]
Question:, what is the put profit, if any, at the end of the year?
A) $1.62
B) $1.93
C) $3.55
D) $5.17
Answer:
Question: The premium on a long term call option on the market index with an exercise price of 950 is $12.00 when originally purchased. After 6 months the position is closed, and the index spot price is 965. If interest rates are 0.5% per month, what is the Call Payoff?
A) $2.64
B) $12.00
C) $12.36
D) $15.00
Answer:
Question: The premium on a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased. After 2 months the position is closed, and the index spot price is 1072. If interest rates are 0.5% per month, what is the Call Profit?
A) $9.30
B) $9.39
C) $12.61
D) $22.00
Answer:
Question: The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. Draw the payoff graph for the short position in the forward contract.
Answer:
Question: An investor has a long call option on the market index at a strike price of $930. At expiration the index price is $920. Explain the profit and loss.
Answer:
Question: The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise price of $930, is $8.00. Draw the payoff graph for the long put position at expiration. Include strike price, breakeven price, and max loss.
Answer:
Question: Develop the payoff table for the previous question, using at least five different possible index prices, in addition to the strike price and breakeven price.
Answer:
Question: As with Chrysler Corp. many years ago, the government occasionally guarantees loans. What option is the government granting and to whom in a loan guarantee?
Answer: