Exam 16: Option Contracts

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 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. -Refer to Exhibit 16.5. Estimate n, which is the number of call options that must be written.

Investors should purchase market index put options if they anticipate an increase in the index value.

The delta in the Black-Scholes model is simply the slope of a line tangent to the call option price curve.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.85 and the put option was purchased, what is the dollar gain or loss?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The following information is provided in the context of a two-period (two six-month periods) binomial option pricing model. A stock currently trades at $60 per share, and a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15 percent or fall by 15 percent during each six-month period. The one-year risk free rate is 3 percent. -Refer to Exhibit 16.2. Calculate the price of the call option today (C₀).

A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free bond.

The Chicago Board Options Exchange has the largest share of stock option trading.

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

Index options can only be settled in cash.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -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 strip is a call option on a stock that is written by someone who owns the stock.

The underlying stock price and the value of the put option are factors that impact the value of an American call option.

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. -Refer to Exhibit 16.6. What would the net value of a short straddle position be if the stock price at expiration is $35?

The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -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.

Unlike stock options, futures options require the holder to enter into a futures contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. How much must an investor pay for one put option contract?

In the Black-Scholes option pricing model, an increase in exercise price (X) will cause

A calendar spread requires the purchase and sale of two calls or two puts in the same stock with

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for a common stock. -Refer to Exhibit 16.7. Calculate the payoff of a long straddle at an expiration stock price of $20.