1. Consider two put options differing only by exercise price. The one with the higher exercise price has Select one: a. the lower breakeven and lower profit potential b. the lower breakeven and greater profit potential c. the higher breakeven and greater profit potential d. the higher breakeven and lower profit potential e. the greater premium and lower profit potential
2.Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration? a. the profit is greater at all stock prices b. the profit is greater only at low stock prices c. the profit is greater only at high stock prices d. the range of possible profits is greater e. none of the above are true
3. Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price? a. the breakeven is lower b. the maximum loss is greater c. the insurance is less costly d. the insurance is more costly e. none of the above
4. What is the disadvantage of a strategy of rolling over a covered call to avoid exercise? a. the call premium is essentially thrown away b. transaction costs tend to be high c. the stock will incur losses d. the call is more expensive when rolled over e. none of the above
5. A synthetic long call position can be created with which of the following sets of transactions. Select one: a. borrow the present value of the strike price, sell stock, sell put b. lend the present value of the strike price, sell stock, buy put c. sell put, buy stock, lend the present value of the strike price d. buy stock, buy put, borrow the present value of the strike price e. none of the above creates a synthetic long call position
6. A synthetic short put position can be created with which of the following sets of transactions. a. borrow the present value of the strike price, sell stock, sell call b. lend the present value of the strike price, sell stock, buy call c. sell call, buy stock, lend the present value of the strike price d. buy stock, buy call, borrow the present value of the strike price e. none of the above creates a synthetic long call position
7. The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.
For questions 15 through 17, consider a bull money spread using the March 45/50 calls. How much will the spread cost? a. $986 b. $302 c. $283 d. $193 e. none of the above
8. The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93
Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.
For questions 1 through 8, consider a bull money spread using the March 45/50 calls. What is the maximum profit on the spread? a. $500 b. $802 c. $198 d. $302 e. none of the above