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Call Option and Price

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Student: ____________________________

1.  You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

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  • A. $4,800
  • B. $200
  • C. $5,000
  • D. $5,200
  • E. None of these is correct

2. The premium on one IBM February 90 call contract is

  • A. $4. 1250
  • B. $418. 00
  • C. $412. 50
  • D. $158. 00
  • E. None of these is correct

3. A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3. 0. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

  • A. $33; $3. 50
  • B. $33; $31. 50
  • C. $35; $3. 50
  • D. $35; $35

4. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish bullish money spread to help limit the cost of your option position. You find the following option quotes: 4. To establish a bull money spread with calls, you would _______________.

  • A. buy the 55 call and sell the 45 call
  • B. buy the 45 call and buy the 55 call
  • C. buy the 45 call and sell the 55 call
  • D. sell the 45 call and sell the 55 call

5. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with puts, you would _______________.

  • A. sell the 55 put and buy the 45 put
  • B. buy the 45 put and buy the 55 put
  • C. buy the 55 put and sell the 45 put
  • D. sell the 45 put and sell the 55 put

6. A covered call strategy benefits from what environment?

  • A. Falling interest rates
  • B. Price stability
  • C. Price volatility D.
  • Unexpected events

7. 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.

  • A. I only
  • B. II only
  • C. I and III only
  • D. I, II, and III

8. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

  • A. Buy the call, sell the put; lend the present value of $40.
  • B. Sell the call, buy the put; lend the present value of $40.
  • C. Buy the call, sell the put; borrow the present value of $40.
  • D. Sell the call, buy the put; borrow the present value of $40.

9. 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 __________.

  • A. greater; lower
  • B. greater; greater
  • C. lower; greater
  • D. lower; lower

10. A hedge ratio for a call is always

  • A. equal to one.
  • B. greater than one.
  • C. between zero and one.
  • D. between minus one and zero.
  • E. of no restricted value.

11. A hedge ratio for a put is always

  • A. equal to one.
  • B. greater than one.
  • C. between zero and one.
  • D. between minus one and zero.
  • E. of no restricted value.

12. Delta neutral

  • A. is the volatility level for the stock that the option price implies.
  • B. is the continued updating of the hedge ratio as time passes.
  • C. is the percentage change in the stock call option price divided by the percentage change in the stock price.
  • D. means the portfolio has no tendency to change the value as the underlying portfolio value changes.
  • E. is the volatility level for the stock that the option price implies and is the percentage change in the stock call option prices divided by the percentage change in the stock price.

13. Dynamic hedging is

  • A. the volatility level for the stock that the option price implies.
  • B. the continued updating of the hedge ratio as time passes.
  • C. the percentage change in the stock call option price divided by the percentage change in the stock price.
  • D. the sensitivity of the delta to the stock price.
  • E. is the volatility level for the stock that the option price implies and is the percentage change in the stock. All option price divided by the percentage change in the stock price.

14. Higher dividend payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend payout policies.

  • A. negative, negative
  • B. positive, positive
  • C. positive, negative
  • D. negative, positive
  • E. zero, zero

15. Relative to European puts, otherwise identical American put options

  • A. are less valuable.
  • B. are more valuable.
  • C. are equal in value.
  • D. will always be exercised earlier.
  • E. none of these is correct.

16. Options sellers who are delta-hedging would most likely

  • A. sell when markets are falling.
  • B. buy when markets are rising.
  • C. sell when markets are falling and buy when markets are rising.
  • D. sell whether markets are falling or rising.
  • E. buy whether markets are falling or rising.

17. An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?

  • A. $8
  • B. $12
  • C. $0
  • D. $4
  • E. cannot be determined without more information.

18. As the underlying stock’s price increased, the call option valuation function’s slope approaches

  • A. zero.
  • B. one.
  • C. two times the value of the stock.
  • D. one-half times the value of the stock.
  • E. infinity.

19. The stock price of Bravo Corp. is currently $100. The stock price a year from now will be either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135 and an expiration date 1 year from now should be worth __________ today.

  • A. $34. 09
  • B. $37. 50
  • C. $38. 21
  • D. $45. 45

20. Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A’s position will ______ and the value of investor B’s position will _______.

  • A. increase; increase
  • B. increase; decrease
  • C. decrease; increase
  • D. decrease; decrease

21. If you know that a call option will be profitably exercised, then the Black-Scholes model price will simplify to _______.

  • A. S0 X
  • B. X S0
  • C. S0 – PV(X)
  • D. PV(X) – S0

22. The Black-Scholes hedge ratio for a long call option is equal to __________.

  • A. N(d1)
  • B. N(d2)
  • C. N(d1) – 1
  • D. N(d2) – 1

23. The Black-Scholes hedge ratio for a long put option is equal to __________.

  • A. N(d1)
  • B. N(d2)
  • C. N(d1) – 1
  • D. N(d2) – 1

24. The current stock price of International Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of International Paper’s stock is 25%. You want to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes OPM, the call option should be worth __________ today.

  • A. $2. 50
  • B. $2. 94
  • C. $3. 26
  • D. $3. 50

25. The Payoff diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is (like):

  • A. The inverse of the call diagram along with the put price
  • B. Unrelated to the call diagram no matter what the exercise price
  • C. The mirror image of the call diagram around the exercise price
  • D. Exactly the same as the call diagram for the given exercise price

26. Figure-3 depicts the:

  • A. Payoff diagram for the writer (seller) of a call option
  • B. Profit diagram for the writer (seller) of a call option
  • C. Payoff diagram for the writer (seller) of a put option
  • D. Profit diagram for the writer (seller) of a put option

27. Buying a call option, investing the resent value of the exercise price in T-bills, and short selling the underlying share is the same as:

  • A. Buying a call and a put
  • B. Buying a put and a share
  • C. Buying a put
  • D. Selling a call

28. If the stock price follows a random walk successive price changes are statistically independent. If ? 2 is the variance of daily price change, and there are t days until expiration, the variance of the cumulative price changes is:

  • A. ?2
  • B. (? 2)*(t)
  • C. (? 2)/t
  • D. None of the above

29. Suppose ABC’s stock price is currently $25. In the next six months, it will either fall to $15 or rise to $40. What is the current value of a six-month call option with an exercise price of $20? The six-month risk-free interest rate is 5% (periodic rate). [Use the risk-neutral valuation method]

  • A. $20. 00
  • B. $8. 57
  • C. $9. 52
  • D. $13. 10

30. Suppose VS’s stock price is currently $20. In the next six months, it will either fall to $10 or rise to $30. What is the current value of a put option with an exercise price of $15? The six-month risk-free interest rate is 5% (periodic rate).

  • A. $5. 00
  • B. $2. 14
  • C. $0. 86
  • D. $7. 86

31. Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by:

  • A. Buying the underlying stock and selling a call
  • B. Selling a put and lending the present value of the exercise price
  • C. Buying the underlying stock and buying a put
  • D. Buying the underlying stock and selling a put

32. The call option on a dividend-paying stock compared to a non-dividend-paying stock is:

  • A. more valuable because of the extra dividend payment.
  • B. equal in value because cash dividends are paid on stock only.
  • C. less valuable because cash dividends are paid on stock only.
  • D. less valuable if the dividend-paying stock is in-the-money while the non-dividend paying stock if out of-the-money.
  • E. None of the above.

33. Strike prices of options are adjusted for ____________ but not for ____________.

  • A. dividends; stock splits
  • B. stock splits; cash dividends
  • C. exercise of warrants; stock splits
  • D. stock price movements; stock dividends

34. When the returns of an option and stock are perfectly correlated as in a two-state binomial option model, the hedge ratio must be equal to the ratio of ____________.

  • A. the range of the option outcomes to the range of the stock outcomes
  • B. the range of the stock outcomes to the range of the option outcomes
  • C. the standard deviation of the option returns to the standard deviation of the stock returns
  • D. he standard deviation of the stock returns to the standard deviation of the option returns

35. Given an exercise price E, time to maturity T and European put-call parity, the present value of the strike price E plus the call option is equal to:

  • A. the current market value of the share.
  • B. the present value of the share minus a put option.
  • C. a put option minus the market value of the share.
  • D. the value of a Treasury bill.
  • E. the share plus the put option.

36. You can realize the same value as that derived from share ownership if you:

  • A. sell a put option and invest at the risk-free rate of return.
  • B. buy a call option and write a put option on a share and also lend out funds at the risk-free rate.
  • C. sell a put and buy a call on a share as well as invest at the risk-free rate of return.
  • D. lend out funds at the risk-free rate of return and sell a put option on the share.
  • E. borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

37. In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is:

  • A. less than or equal to N(d2).
  • B. less than one.
  • C. equal to one.
  • D. equal to d1.
  • E. less than or equal to d1.

38. Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com to share to increase but also causes an increase in price volatility of the share. Which of the following correctly identifies the impact of these changes on the call option of Tele-Tech Com?

  • A. Both changes cause the price of the call option to decrease.
  • B. Both changes cause the price of the call option to increase.
  • C. The greater uncertainty will cause the price of the call option to decrease. The higher price of the share will cause the price of the call option to increase.
  • D. The greater uncertainty will cause the price of the call option to increase. The higher price of the share will cause the price of the call option to decrease.
  • E. The greater uncertainty has no direct effect on the price of the call option. The higher price of the share. will cause the price of the call option to decrease.

39. Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com to share to increase but also causes an increase in price volatility of the share.

Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?

  • A. Both changes cause the price of the put option to decrease.
  • B. Both changes cause the price of the put option to increase.
  • C. The greater uncertainty will cause the price of the put option to decrease. The higher price of the share. will cause the price of the put option to increase.
  • D. The greater uncertainty will cause the price of the put option to increase. The higher price of the share. will cause the price of the put option to decrease.
  • E. The greater uncertainty has no direct effect on the price of the put option. The higher price of the share. will cause the price of the put option to decrease.

40. What is the value of one November 35 put contract? KNJ (KNJ) Underlying share price: 30. 86 Call Put Expiration Strike Last Last Aug 25 6. 15 . 05 Nov 25 6. 60. 10 Aug 35 .10 4. 60 Nov 35 .70 5. 10

  • A. $70
  • B. $460
  • C. $510
  • D. $4,600
  • E. $5,100

Solutions: 1 A, 6 A, 11 D, 16 C, 21 B, 26 D, 31 B, 36 C(or,D), 2 C, 7 D, 12 D, 17 D, 22 A, 27 D, 32 C, 37 C, 3 D, 8 B, 13 B, 18 B, 23 D, 28 B, 33 B, 38 E, 4 D, 9 D, 14 D, 19 B, 24 C, 29 D, 34 D, 39 C, 5 D, 10 C, 15 B, 20 A, 25 D, 30 B, 35 A, 40 A.

Cite this Call Option and Price

Call Option and Price. (2016, Dec 19). Retrieved from https://graduateway.com/call-option-and-price-2/

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