Chapter 20 – Options Markets: Introduction
20–33
89. The put-call parity theorem
Difficulty: Moderate
90. Some more “traditional” assets have option-like features; some of these instruments
include
Difficulty: Easy
91. Financial engineering
Difficulty: Easy
20–34
92. Protective puts offer an advantage over stop-loss orders in that
Difficulty: Moderate
93. A collar with a net outlay of approximately zero is an options strategy that
Difficulty: Easy
94. Top Flight Stock currently sells for $53. A one-year call option with strike price of $58
sells for $10, and the risk free interest rate is 5.5%. What is the price of a one-year put with
strike price of $58?
Difficulty: Difficult
20–35
95. HighFlyer Stock currently sells for $48. A one-year call option with strike price of $55
sells for $9, and the risk free interest rate is 6%. What is the price of a one-year put with strike
price of $55?
Difficulty: Difficult
96. ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for
$9, and the risk free interest rate is 4%. What is the price of a one-year put with strike price of
$45?
Difficulty: Difficult
97. A callable bond should be priced the same as
Difficulty: Moderate
20–38
104. Exchange-traded stock options expire
Difficulty: Easy
105. You purchased a call option for $3.45 seventeen days ago. The call has a strike price of
$45 and the stock is now trading for $51. If you exercise the call today, what will be your
holding period return? If you do not exercise the call today and it expires, what will be your
holding period return?
A. 173.9%, -100%
Difficulty: Easy
20–39
106. An option with an exercise price equal to the underlying asset’s price is
Difficulty: Easy
107. To the option holder, put options are worth ______ when the exercise price is higher;
call options are worth ______ when the exercise price is higher.
Difficulty: Easy
108. The minimum tick size for a CBOE option selling above $3 is ________.
Difficulty: Easy
20–40
109. What happens to an option if the underlying stock has a 2-for-1 split?
Difficulty: Easy
110. What happens to an option if the underlying stock has a 3-for-1 split?
Difficulty: Easy
20–41
111. Suppose that you purchased a call option on the S&P 100 index. The option has an
exercise price of 680 and the index is now at 720. What will happen when you exercise the
option?
A. You will have to pay $680.
720.
Difficulty: Moderate
112. Suppose that you purchased a call option on the S&P 100 index. The option has an
exercise price of 700 and the index is now at 760. What will happen when you exercise the
option?
A. You will have to pay $6,000.
760.
Difficulty: Moderate
Chapter 20 – Options Markets: Introduction
20–42
Short Answer Questions
113. What is the Option Clearing Corporation (OCC) and how does this organization facilitate
option trading?
Difficulty: Easy
114. Describe the protective put. What are the advantages of such a strategy?
Difficulty: Moderate
20–43
115. Discuss the differences in writing covered and naked calls. Are risks involved in the two
strategies similar or different? Explain.
Difficulty: Moderate
116. Draw a graph that shows the payoff and profit to the holder of a call option at expiration.
Draw another graph that shows the payoff to the holder of a put option at expiration. Draw a
third graph that shows the payoff of a long straddle at expiration. Be sure to label the axes and
all other relevant features of the graphs.
The first graph should look like Figure 20.3 on page 706. The second graph should look like
Figure 20.5 on page 708. The third graph should look like panel C in Figure 20.9 on page 714.
Difficulty: Difficult
20–44
117. List two types of exotic options and describe their characteristics.
There are five exotic options mentioned in the textbook:
• Asian Options have payoffs that depend on the average price of the underlying asset during
at least some portion of the life of the option.
Difficulty: Moderate