Chapter 16 – Option Contracts
a.
$7.77
b.
$14.35
c.
$0
d.
$4.21
e.
$6.44
60. Refer to Exhibit 16.2. Calculate the price of the call option after the stock price has already moved down in value once
(Cd).
a.
$7.77
b.
$14.35
c.
$0
d.
$4.21
e.
$6.44
61. Refer to Exhibit 16.2. Calculate the price of the call option today (C0).
a.
$7.77
b.
$14.35
c.
$0
d.
$4.21
e.
$6.44
Chapter 16 – Option Contracts
Exhibit 16.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options
expire in 10 days. The risk-free rate is 3 three over this time period, and the expected volatility is 0.35.
62. Refer to Exhibit 16.3. Use the Black-Scholes option pricing model to calculate the price of a call option.
a.
$5.19
b.
$4.35
c.
$3.93
d.
$6.19
e.
$8.17
63. Refer to Exhibit 16.3. Calculate the price of the put option.
a.
$1.086
b.
$0.862
c.
$6.234
d.
$0.623
e.
$2.317
64. Which of the following is NOT a factor needed to calculate the value of an American call option?
a.
b.
c.
d.
e.
65. If the hedge ratio is 0.50, this indicates that the portfolio should hold
a.
two shares of stock for every call option written.
b.
one share of stock for every two call options written.
c.
two shares of stock for every call option purchased.
d.
one share of stock for every two call options purchased.
e.
two call options for every put option written.
66. Options can be used to
a.
modify an equity portfolio’s systematic risk.
b.
modify an equity portfolio’s unsystematic risk.
c.
manage currency exposures in international equity portfolios.
d.
change a portfolio’s exposure to a particular asset.
e.
All of these are correct.
67. A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
a.
the same expiration date but different exercise prices.
b.
the same exercise price but different expiration dates.
c.
different exercise prices and different expiration dates.
d.
the same exercise price and the same expiration month.
e.
traded in different markets.
68. In a money spread, an investor would
a.
buy two in-the-money call options on the same stock with different exercise dates.
b.
buy two out–of-the-money call options on the same stock with different exercise dates.
c.
sell two in-the-money call options on the same stock with different exercise dates.
d.
sell an out–of-the-money call and purchase an in-the-money call on the same stock with the same exercise
date.
e.
sell two out–of-the-money call options on the same stock with different exercise dates.
69. A money spread involves buying and selling call options in the same stock with
a.
the same time period and exercise price.
b.
the same time period but different exercise price.
c.
a different time period but same exercise price.
d.
a different time period and different exercise price.
e.
options in different markets.
70. If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October
option with an exercise price of 60 for $2, you would be
a.
bullish and taking a high risk.
b.
bullish and conservative.
c.
bearish and taking a high risk.
d.
bearish and conservative.
e.
neutral.
71. You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit, but you are
troubled about the short-run behavior of the stock market. An effective action on your part would be to
a.
purchase a put.
b.
purchase a call.
c.
purchase an index option.
d.
utilize a bearish spread.
e.
utilize a bullish spread.
72. If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October
option with an exercise price of 60 for $2, you would be
a.
bullish and taking a high risk.
b.
bullish and conservative.
c.
bearish and taking a high risk.
d.
bearish and conservative.
e.
neutral.
73. A vertical spread involves buying and selling call options in the same stock with
a.
the same time period and price.
b.
the same time period but different price.
c.
a different time period but same price.
d.
a different time period and different price.
e.
options in different markets.
74. Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain
Chapter 16 – Option Contracts
exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the
effective price paid to repurchase the stock if the price after 35 days is $65.
a.
$71.75
b.
$76.75
c.
$58.25
d.
$81.75
e.
$85.25
75. Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain
exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the
effective price paid to repurchase the stock if the price after 35 days is $80.
a.
$81.75
b.
$73.25
c.
$86.75
d.
$76.75
e.
$85.25
76. Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain
exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the
effective price paid to repurchase the stock if the price after 35 days is $70.
a.
$77.75
b.
$87.25
c.
$82.25
d.
$72.75
Chapter 16 – Option Contracts
e.
$85.25
77. Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain
exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the
effective price paid to repurchase the stock if the price after 35 days is $85.
a.
$77.75
b.
$87.25
c.
$82.25
d.
$72.75
e.
$85.25
Exhibit 16.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
Strike Price
Put Price
Call Price
$32.50
$2.85
$1.65
78. Refer to Exhibit 16.4. Calculate the net value of a protective put position at a stock price at expiration of $20 and a
stock price at expiration of $45.
a.
$6.35, $18.85
b.
$29.65, $42.15
c.
$21.65, $34.15
Chapter 16 – Option Contracts
d.
$8, $8
e.
−$8, −$8
79. Refer to Exhibit 16.4. A protective put is an appropriate strategy if
a.
an investor wishes to generate additional income.
b.
an investor wished to insure against a decline in share values.
c.
an investor expected share prices to be volatile.
d.
an investor expected share prices to remain in a trading range.
e.
an investor expected share prices to be volatile but was inclined to be bullish.
80. Refer to Exhibit 16.4. Calculate the net value of a covered call position at a stock price at expiration of $20 and a stock
price at expiration of $45.
a.
$6.35, $18.85
b.
$29.65, $42.15
c.
$21.65, $34.15
d.
$8, $8
e.
−$8, −$8
81. Refer to Exhibit 16.4. A covered call is an appropriate strategy if
a.
an investor wishes to generate additional income.
b.
an investor wished to insure against a decline in share values.
c.
an investor expected share prices to be volatile.
d.
an investor expected share prices to remain in a trading range.
e.
an investor expected share prices to be volatile but was inclined to be bullish.
82. Refer to Exhibit 16.4. Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a stock price at
expiration of $45.
a.
$6.35, $18.85
b.
$29.65, $42.15
c.
$21.65, $34.15
d.
$8, $8
e.
−$8, −$8
83. Refer to Exhibit 16.4. A long straddle is an appropriate strategy if
Chapter 16 – Option Contracts
a.
an investor wishes to generate additional income.
b.
an investor wished to insure against a decline in share values.
c.
an investor expected share prices to be volatile.
d.
an investor expected share prices to remain in a trading range.
e.
an investor expected share prices to be volatile but was inclined to be bullish.
84. Refer to Exhibit 16.4. Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at
expiration of $45.
a.
$6.35, $18.85
b.
$29.65, $42.15
c.
$21.65, $34.15
d.
$8, $8
e.
−$8, −$8
85. Refer to Exhibit 16.4. A short straddle is an appropriate strategy if
a.
an investor wishes to generate additional income.
b.
an investor wished to insure against a decline in share values.
c.
an investor expected share prices to be volatile.
d.
an investor expected share prices to remain in a trading range.
e.
an investor expected share prices to be volatile but was inclined to be bullish.
86. Refer to Exhibit 16.4. Calculate the payoffs of a long strap at a stock price at expiration of $20 and a stock price at
expiration of $45.
a.
$6.35, $18.85
b.
$29.65, $42.15
c.
$21.65, $34.15
d.
$8, $8
e.
−$8, −$8
87. Refer to Exhibit 16.4. A long strap is an appropriate strategy if
a.
an investor wishes to generate additional income.
b.
an investor wished to insure against a decline in share values.
c.
an investor expected share prices to be volatile.
d.
an investor expected share prices to remain in a trading range.
e.
an investor expected share prices to be volatile but was inclined to be bullish.
Exhibit 16.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chapter 16 – Option Contracts
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock
currently trades at $50 per share, and a call option on the stock has an exercise price of $45. The stock is equally likely to
rise by 25 percent or fall by 25 percent. The one-year, risk-free rate is 2 percent.
88. Refer to Exhibit 16.5. Calculate the possible prices of the stock one year from today.
a.
$37.50 or $17.50.
b.
$62.50 or $37.50.
c.
$62.50 or $17.50.
d.
$50 or $45.
e.
None of the above.
89. Refer to Exhibit 16.5. Estimate n, which is the number of call options that must be written.
a.
−1.4286
b.
−2.9286
c.
−2.8571
d.
−2.5714
e.
−1.1111
90. Refer to Exhibit 16.5. Calculate the price of the call option today (C0).
a.
$7.56
b.
$17.48
Chapter 16 – Option Contracts
c.
$9.26
d.
$5.0
e.
$17.15
Exhibit 16.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
91. Refer to Exhibit 16.6. What would the net value of a protective put position be if the stock price at expiration is $35?
a.
$3.10
b.
$30.15
c.
$32.10
d.
$34.05
e.
$35.00
92. Refer to Exhibit 16.6. What would the net value of a covered call position be if the stock price at expiration is $35?
a.
$29.00
b.
$30.65
c.
$33.55
d.
$36.00
e.
$36.65