Exam 16: Option Contracts

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 after the stock price has already moved up in value once (C_u).

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. A short straddle is an appropriate strategy if

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 long strap position be if the stock price at expiration is $35?

It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?

There is an inverse relationship between the market interest rate and the value of a call option.

In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause

In the Black-Scholes option pricing model, an increase in the risk-free rate (RFR) will cause

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 net value of a protective put position at an expiration stock price of $20.

If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October option with an exercise price of 60 for $2, you would be

European options can only be exercised on the expiration date.

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. A protective put is an appropriate strategy if

The conversion premium for a convertible bond is calculated as

The longer the time to expiration, the greater the value of a call option.

If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October option with an exercise price of 60 for $2, you would be

A long-strip position indicates that an investor is bullish but conservative.

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 protective put position be if the stock price at expiration is $35?

It is a violation of the securities laws to combine option contracts to achieve a customized payoff.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.80 and the call option was purchased, what is the dollar gain or loss?

By attaching a convertible feature to a bond issue, a firm can often get a lower rate of interest on its debt.