68. You sell one IBM 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 IBM stock sells for $95 per share.
You will realize a ______ on this strip.
69. Which strategy benefits from upside price movement and has some protection should the
price of the security fall?
70. What combination of puts and calls can simulate a long stock investment?
71. An investor purchases a long call at a price of $2.50. The expiration price is $35. If the
current stock price is $35.10, what is the break-even point for the investor?
72. 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?
73. Which of the following strategies makes a profit if the stock price stays stable?
74. Which of the following strategies makes a profit when the stock price declines and loses
money when the stock price increases?
75. If you combine a long stock position with selling an at-the-money call option, the resulting
net payoff profile will resemble the payoff profile of a _______.
76. What strategy could be considered insurance for an investment in a portfolio of stocks?
77. What strategy is designed to ensure a value within the bounds of two different stock
prices?
78. You are convinced that a stock’s price will move by at least 15% over the next 3 months.
You are not sure which way the price will move, but you believe that the results of a patent
hearing are definitely going to have a major effect on the stock price. You are somewhat more
bullish than bearish however. Which one of the following options strategies best fits this
scenario?
79. When issued, most convertible bonds are issued _____________.
80. A convertible bond is deep in the money. This means the bond price will closely track the
__________.
81. Warrants differ from listed options in that:
I. Exercise of warrants results in dilution of a firm’s earnings per share.
II. When warrants are exercised, new shares of stock must be created.
III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.
82. Suppose you find two bonds identical in all respects except that bond A is convertible to
common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond
A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%.
The stock of bond A is trading at $49.80 per share. Which of the following statements is (are)
correct?
I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its
straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the
current prices.
83. 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 ______.
84. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell
the stock this year due to tax reasons, but he is concerned that the stock will drop in value before
year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn‘t incur too
much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of
$2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the
collar and the stock price winds up at $35 in January, Bill’s net position value including the option
profit or loss and the stock is _________.
85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip
before you are ready to sell, so you are considering purchasing either at-the-money or out–of-the-
money puts. If you decide to purchase the out–of-the-money puts, your maximum loss is
__________ than if you buy at-the-money puts and your maximum gain is __________.
86. You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2–for–1
split prior to the expiration date. You hold the option until the expiration date, when IBM stock
sells for $48 per share. You will realize a ______ on the investment.
87. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6
months. You are considering using either puts or calls to hedge this position. Given this, which of
the following statements is (are) correct?
I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely, hedging with puts is probably better than hedging with
short calls.
