Chapter 14 – An Introduction to Derivative Markets and Securities
d.
require a future settlement payment.
e.
trade on exchanges.
58. An expiration date payoff and profit diagram for forward positions illustrates
a.
gains and losses are usually small.
b.
the payoffs to both long and short positions in the forward contract are asymmetrical around the contract price.
c.
forward contracts are zero-sum games.
d.
long positions benefit from falling prices.
e.
short positions benefit from rising prices.
Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common
stock selling at $37 1/2 per share and is considering an Olivia option.
Calls
Puts
December
March
December
March
3 3/4
5
1 1/4
2
2 1/2
3 1/2
4 1/2
4 3/4
59. Refer to Exhibit 14.1. If Bruce decides to buy a March call option with an exercise price of 35, what is his dollar gain
(loss) if he closes his position when the stock is selling at 43 1/2?
a.
$225.00 loss
b.
$350.00 loss
Chapter 14 – An Introduction to Derivative Markets and Securities
c.
$225.00 gain
d.
$350.00 gain
e.
$850.00 gain
60. Refer to Exhibit 14.1. If Bruce buys a March put option with an exercise price of 40, what is his dollar gain (loss) if he
closes his position when the stock is selling at 43 1/2?
a.
$825.00 loss
b.
$475.00 loss
c.
$350.00 loss
d.
$25.00 loss
e.
$50.00 gain
Exhibit 14.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44
per share:
(1)
Buy 500 shares
(2)
Buy six-month call options with an exercise price of 45 for $3.25 premium.
61. Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock reaches
$50 in four months and a call was purchased?
a.
161.54 percent gain
Chapter 14 – An Introduction to Derivative Markets and Securities
b.
53.85 percent gain
c.
161.54 percent loss
d.
11.11 percent gain
e.
53.85 percent loss
62. Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock is at $30
in four months and the stock was purchased?
a.
9.54 percent loss
b.
95.45 percent loss
c.
0.9545 percent gain
d.
95.45 percent gain
e.
9.54 percent gain
63. Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put
option with an exercise price of $105.00 for $20.00. What is his dollar gain if the stock is selling for $80.00 per share at
expiration?
a.
$200 loss
b.
$700 loss
c.
$200 gain
d.
$700 gain
e.
$900 gain
64. Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put
option with an exercise price of $105.00 for $20.00. What is Tom’s dollar gain/loss if at expiration the stock is selling for
$105.00 per share?
a.
$1000 gain
b.
$200 loss
c.
$1000 loss
d.
$200 gain
e.
$500 gain
65. Refer to Exhibit 14.3. If at expiration Peppy is selling for $42.00, what is Sarah’s dollar gain or loss?
a.
$420 gain
b.
$420 loss
c.
$475 loss
d.
$475 gain
e.
$525 gain
Exhibit 14.3
Chapter 14 – An Introduction to Derivative Markets and Securities
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy
was selling for $48.00 per share.
66. Refer to Exhibit 14.3. What is Sarah’s annualized gain/loss?
a.
11.51 percent gain
b.
115.15 percent gain
c.
11.51 percent loss
d.
115.15 percent loss
e.
0 percent
67. Refer to Exhibit 14.3. If at expiration Peppy is selling for $47.00, what is Sarah’s dollar gain or loss?
a.
$25 loss
b.
$250 loss
c.
$25 gain
d.
$250 gain
e.
$0
68. Refer to Exhibit 14.3. What is Sarah’s annualized gain/loss?
a.
60.60 percent gain
b.
6.06 percent loss
c.
60.60 percent loss
d.
6.06 percent gain
Chapter 14 – An Introduction to Derivative Markets and Securities
e.
0 percent
69. A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk-free
bond has a price of $30. Calculate the price of the January put option.
a.
$11
b.
$24
c.
$19
d.
$30
e.
$25
70. Assume that you have purchased a call option with a strike price $60 for $5. At the same time, you purchase a put
option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the
dollar return on this option strategy.
a.
$10
b.
−$4
c.
$5
d.
$6
e.
$15
71. Assume that you purchased shares of a stock at a price of $35 per share. At this time, you purchased a put option with
a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.
a.
$3
b.
−$2
c.
$2
d.
−$3
e.
$0
72. Assume that you purchased shares of a stock at a price of $35 per share. At this time, you wrote a call option with a
$35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option
strategy.
a.
$25
b.
−$2
c.
$2
d.
−$25
e.
$0
73. A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate
the arbitrage profit that you can earn.
a.
$0
b.
$1
Chapter 14 – An Introduction to Derivative Markets and Securities
c.
$5
d.
$4
e.
$9
74. Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75.
October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the
August and October options.
a.
−$0.50
b.
$0
c.
$0.50
d.
$5
e.
−$5
75. A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25.
Calculate the dollar return on one put contract.
a.
−$525
b.
$1000
c.
$0
d.
−$1000
e.
$525
76. A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75.
Calculate the dollar return on one call contract.
a.
−$1000
b.
$1000
c.
$575
d.
−$575
e.
$0
77. Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price
of $55.
a.
$10
b.
$50
c.
$55
d.
−$10
e.
$0
78. Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price
of $35.
Chapter 14 – An Introduction to Derivative Markets and Securities
a.
$15
b.
$55
c.
$35
d.
−$15
e.
$0
79. Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise
price of $35.
a.
$25
b.
$35
c.
$0
d.
−$10
e.
$10
80. Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise
price of $15.
a.
$25
b.
−$5
c.
$0
d.
$20
e.
$5
Chapter 14 – An Introduction to Derivative Markets and Securities
Exhibit 14.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that
expire six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent.
Exercise Price
Put Price
Call Price
50
$1.50
$5.75
55
$3.25
—
81. Refer to Exhibit 14.4. What should the price be of a call option that expires six months from today with an exercise
price of $55?
a.
$1.33
b.
$3.08
c.
$4.58
d.
$6.07
e.
$6.33
82. Refer to Exhibit 14.4. What is the value of a synthetic stock created with put and call options that expire in six months
with an expiration price of $50?
a.
$53.04
b.
$53.53
c.
$54.54
d.
$55.03
e.
$56.23
83. You own a call option and put option that both have the same exercise price of $50, and their respective prices are $4
and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.
a.
$1.00
b.
$2.00
c.
$3.00
d.
$4.00
e.
$5.00
Exhibit 14.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with
exercise prices at $45 and $50.
Exercise Price
Put Price
Call Price
$45
$1.50
$6.75
$50
$3.75
$4.25
84. Refer to Exhibit 14.5. The time premium for the put option with a $45 exercise price is
a.
$0.00.
b.
$1.50.
c.
$2.75.
d.
$5.25.
e.
$6.50.
85. Refer to Exhibit 14.5. The intrinsic value for the put option with a $50 exercise price is
a.
$0.00.
b.
$1.50.
c.
$2.25.
d.
$3.75.
e.
$8.75.
86. Refer to Exhibit 14.5. The intrinsic value for the call option with a $45 exercise price is
a.
$0.00.
b.
$1.50.
c.
$5.00.
d.
$5.25.
e.
$6.75.
87. Refer to Exhibit 14.5. The time premium for the call option with a $50 exercise price is
a.
$0.00.
b.
$1.50.
c.
$1.75.
d.
$4.25.
e.
$9.25.
Exhibit 14.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that
expire six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent.
Exercise Price
Put Price
Call Price
50
$1.50
$5.75
55
$3.25
—
88. Refer to Exhibit 14.6. How could an investor create arbitrage profits?
a.
sell the stock short, write a put, buy a call, and invest the proceeds at the risk-free rate
b.
buy the stock, write a put, buy a call, and invest the proceeds at the risk-free rate
c.
sell the stock short, buy a put, write a call, and invest the proceeds at the risk-free rate
d.
buy the stock, write a put, buy a call, and borrow the strike price at the risk-free rate
e.
sell the stock short, write a put, buy a call, and borrow the strike price at the risk-free rate.
89. A stock currently trades for $63. Call options with a strike price of $62 sell for $4.00 and expire in six months. If the
risk-free rate is 4 percent, what should the price of a put option with an exercise price of $62 be worth?
a.
$0.62
b.
$0.98
c.
$1.80
d.
$3.00
e.
$5.80
90. In the valuation of an option contract, the following statements apply EXCEPT:
a.
The value of an option increases with its maturity.
b.
There is a negative relationship between the market interest rate and the value of a call option.
c.
The value of a call option is negatively related to its exercise price.
d.
The value of a call option is positively related to the volatility of the underlying asset.
e.
The value of a call option is positively related to the price of the underlying stock.
91. Which of the following is consistent with put-call-spot parity?
a.
S + C = P + X/(1 + RFR)
b.
S + P = C + X/(1 + RFR)
c.
S − C = P + X/(1 + RFR)
d.
S − P = C + X/(1 + RFR)
e.
S = P − C + X/(1 + RFR)
92. According to put/call parity:
a.
Stock price + Call Price = Put Price + Risk Free Bond Price
b.
Stock price + Put Price = Call Price + Risk Free Bond Price
c.
Put price + Call Price = Stock Price + Risk Free Bond Price
d.
Stock price − Put Price = Call Price + Risk Free Bond Price
e.
Stock price + Call Price = Put Price − Risk Free Bond Price
93. A one-year call option has a strike price of 50, expires in 6 months, and has a price of $5.04. If the risk-free rate is 5
percent, and the current stock price is $50, what should the corresponding put be worth?
a.
$3.04
b.
$4.64
c.
$6.08
d.
$3.83
e.
$0
94. A one-year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk-free rate is 3
percent, and the current stock price is $45, what should the corresponding put be worth?
a.
$12.74
b.
$10.48
c.
$5.00
d.
$9.00
e.
$8.30
95. A one-year call option has a strike price of 60, expires in 6 months, and has a price of $2.5. If the risk-free rate is 7
percent, and the current stock price is $55, what should the corresponding put be worth?
a.
$5.00
b.
$4.56
c.
$5.50
d.
$7.08
e.
$7.54
96. A one-year call option has a strike price of 70, expires in three months, and has a price of $7.34. If the risk-free rate is
6 percent, and the current stock price is $62, what should the corresponding put be worth?
a.
$5.34
b.
$8.00
c.
$10.68
Chapter 14 – An Introduction to Derivative Markets and Securities
d.
$14.33
e.
$13.33
97. A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options
a strike price of $100 sell for $5. Estimate the price of a risk-free bond.
a.
$120
b.
$15
c.
$105
d.
$116
e.
$104
98. Derivative securities can be used
a.
by investors in the same way as the underlying security.
b.
to modify the risk and expected return characteristics of existing investment portfolios.
c.
to duplicate cash flow patterns for arbitrage opportunities.
d.
to protect against potential price declines.
e.
All of these are correct.
99. Holding a put option and the underlying security at the same time is an example of
a.
a collar.
b.
a straddle.
c.
income generation.
d.
portfolio insurance.
e.
a reverse collar.
100. An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the
payoffs are
a.
not correlated with the existing exposure.
b.
positively correlated with the existing exposure.
c.
negatively correlated with the existing exposure.
d.
at breakeven with the existing exposure.
e.
imperfectly correlated with the existing exposure.
101. The derivative based strategy known as portfolio insurance involves
a.
the sale of a put option on the underlying security position.
b.
the purchase of a put on the underlying security position.
c.
the sale of a call on the underlying security position.
d.
the purchase of a call on the underlying security position.
Chapter 14 – An Introduction to Derivative Markets and Securities
e.
the simultaneous sale of an out–of-the-money put and purchase of an out–of-the-money call.
102. A hedge strategy known as a collar agreement involves the simultaneous
a.
purchase of an in-the-money put and purchase of an out–of-the-money call on the same underlying asset with
same expiration date and market price.
b.
sale of an out–of-the-money put and sale of an out-of-the-money call on the same underlying asset with same
expiration date and market price.
c.
purchase of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same
expiration date and market price.
d.
purchase of an out–of-the-money put and sale of an out-of-the-money call on the same underlying asset with
same expiration date and market price.
e.
sale of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same
expiration date and market price.