Exam 16: Understanding Options

Position diagrams and profit diagrams are one and the same.

Relative to the underlying stock, a call option always has:

The buyer of a call option has the right to exercise, but the writer of the call option has:

An increase in the stock price results in an increase in the call option price.

Figure-2 depicts the:

The owner of a regular exchange-listed put-option on the stock:

In June 2007, an investor buys a call option on Amgen stock with an exercise of price of $65 and expiring in January 2009. If the stock price in June 2003 is $60, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS

Briefly explain what is meant by "protective put."

In June 2007, an investor buys a put option on Genentech stock with an exercise of price Of $75 and expiring in January 2009. If the stock price in June 2007 is $80, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS

For European options, the value of a call plus the present value of the exercise price is equal to:

The value of an option (both call and put) is positively related to: I. volatility of the underlying stock price II. time to expiration III. risk-free rate

The following are examples of disguised options for firms: I. acquiring growth opportunities II. ability of the firm to terminate a project when it is no longer profitable III. options that are associated with corporate securities that provide flexibility to change the terms of the issues

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs)

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?

For European options, the value of a put is equal to:

Briefly explain what is meant by put-call parity?

Briefly explain the relationship between risk and option values.

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

Briefly explain how position diagrams are useful?