Chapter 16 – Option Contracts
93. Refer to Exhibit 16.6. 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
94. Refer to Exhibit 16.6. 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
95. Refer to Exhibit 16.6. 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
96. Refer to Exhibit 16.6. 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
Exhibit 16.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock.
Put Price
Call Price
Chapter 16 – Option Contracts
$2.65
$1.85
97. Refer to Exhibit 16.7. 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
98. Refer to Exhibit 16.7. 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
99. Refer to Exhibit 16.7. 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
Chapter 16 – Option Contracts
e.
$20.50
100. Refer to Exhibit 16.7. 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
Exhibit 16.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XYZ CORP
Exercise
NYSE
Date
Price
Price
Close
Calls
OCT
85
16 3/4
101 11/16
OCT
90
12
101 11/16
OCT
95
7 5/8
101 11/16
Puts
OCT
85
1/8
101 11/16
OCT
90
3/8
101 11/16
OCT
95
13/16
101 11/16
101. Refer to Exhibit 16.8. 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?
Chapter 16 – Option Contracts
a.
$18.75 loss
b.
$18.75 gain
c.
$1,668.75 gain
d.
$1,668.75 loss
e.
$1,687.50 loss
102. Refer to Exhibit 16.8. 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
103. Refer to Exhibit 16.8. 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
104. Refer to Exhibit 16.8. 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
105. Refer to Exhibit 16.8. 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
106. Refer to Exhibit 16.8. 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
107. Refer to Exhibit 16.8. 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
108. Refer to Exhibit 16.8. 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
109. Refer to Exhibit 16.8. 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
110. Refer to Exhibit 16.8. 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
111. All of the following are normal characteristics of a convertible bond, EXCEPT
a.
conversion at the option of the issuer.
b.
conversion into a fixed number of shares of common stock.
c.
a conversion price initially above the market price of the common stock.
d.
an interest rate lower than that on straight debentures.
e.
subordination.
112. An advantage of convertible bonds is
a.
investors get the upside potential of a bond.
b.
investors get the upside potential of a stock.
c.
issuing firms can get a lower rate of interest on its debt.
d.
a and b
e.
b and c
113. All of the following are normal characteristics of a convertible bond, EXCEPT
a.
conversion at the option of the issuer.
b.
conversion into a fixed number of shares of common stock.
c.
a conversion price initially above the market price of the common stock.
d.
an interest rate lower than that on straight debentures.
e.
subordination.
114. The minimum price of a convertible bond is
a.
min (Bond Value, Conversion Value).
b.
max (Bond Value, Conversion Value).
c.
min (Stock Value, Conversion Value).
d.
max (Stock Value, Conversion Value).
e.
None of these are correct.
115. The conversion premium for a convertible bond is calculated as
a.
(Market Price + Minimum Value)/Minimum Value.
b.
(Market Price/Minimum Value) Minimum Value.
c.
(Market Price + Minimum Value) Minimum Value.
d.
(Market Price − Minimum Value)/Minimum Value.
e.
(Market Price Minimum Value)/Minimum Value.
116. The conversion price parity for a convertible bond is defined as
a.
Market Price of Convertible Bond / Conversion Ration.
b.
Market Price of Convertible Bond Conversion Ration.
Chapter 16 – Option Contracts
c.
Market Price of Convertible Bond − Conversion Ration.
d.
Market Price of Convertible Bond + Conversion Ration.
e.
None of these are correct.
117. The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a
a.
total return swap.
b.
credit default swap.
c.
collar.
d.
forward rate agreement.
e.
swap agreement.
118. In convertible bonds, the value of the common stock price upon immediate conversion is the
a.
put-call parity price.
b.
conversion parity price.
c.
cash equivalent price.
d.
convertible price.
e.
redemption price.
Chapter 16 – Option Contracts
Exhibit 16.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company’s common stock at $30.
The coupon rate is 11 percent payable semiannually, and they mature in 10 years.
119. Refer to Exhibit 16.9. Calculate the conversion value of the bond if the stock price is $27.00 per share.
a.
$600.00
b.
$700.00
c.
$800.00
d.
$900.00
e.
$1,000.00
120. Refer to Exhibit 16.9. Calculate the straight-bond value assuming that bonds of equivalent risk and maturity are
yielding 14 percent per year compounded semiannually.
a.
$757.37
b.
$796.83
c.
$841.07
d.
$889.82
e.
$902.65
121. Refer to Exhibit 16.9. At present, what would be the minimum value of the bond?
a.
$600.00
b.
$796.83
c.
$889.82
d.
$900.00
e.
$1000.00
122. The common stock of BioTech Industries pays a dividend of $1 per share and has a current market price of $27 per
share. The convertible bond is selling for $1100. The payback or breakeven time for the bond is
a.
1.75 years.
b.
2.89 years.
c.
3.20 years.
d.
3.60 years.
e.
4.32 years.