Question 1

Any strategy consisting of only long options will lose money if the stock price stays the same.

Accepted Answer

A) True 
 B)False  True

Question 2

What is the breakeven stock price at expiration for the transaction described in problem 6?

Accepted Answer

A)  $27.11 
B)  $30.00 
C)  $32.89 
D)  $29.89 
E)  none of the above 
A)  $27.11 
B)  $30.00 
C)  $32.89 
D)  $29.89 
E)  none of the above A

Question 3

The difference in profit from an actual put and a synthetic put is

Accepted Answer

A)  X 
B)  ST - X 
C)  X - ST 
D)  ST + X(1 + r)-T 
E)  none of the above 
A)  X 
B)  ST - X 
C)  X - ST 
D)  ST + X(1 + r)-T 
E)  none of the above E

Question 4

What is the maximum profit from the transaction described in Question 6 if the position is held to expiration?

Accepted Answer

A)  $3,289 
B)  $289 
C)  infinity 
D)  $2,711 
E)  none of the above 
A)  $3,289 
B)  $289 
C)  infinity 
D)  $2,711 
E)  none of the above

Question 5

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33. How much profit would the buyer make?

Accepted Answer

A)  $32.89 
B)  $30.11 
C)  $78.00 
D)  $11.00 
E)  none of the above 
A)  $32.89 
B)  $30.11 
C)  $78.00 
D)  $11.00 
E)  none of the above

Question 6

Which of the following is equivalent to a synthetic call?

Accepted Answer

A)  a long stock and a short put position 
B)  a long put and a long stock position 
C)  a long put and a short risk-free bond position 
D)  a long stock and a short risk-free bond position 
E)  none of the above 
A)  a long stock and a short put position 
B)  a long put and a long stock position 
C)  a long put and a short risk-free bond position 
D)  a long stock and a short risk-free bond position 
E)  none of the above

Question 7

An investor can construct a synthetic put by buying a call and selling short a stock.

Accepted Answer

A) True 
 B)False

Question 8

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following strategies has essentially the same profit diagram as a covered call?

Accepted Answer

A)  a long put 
B)  a short put 
C)  a protective put 
D)  a long call 
E)  none of the above 
A)  a long put 
B)  a short put 
C)  a protective put 
D)  a long call 
E)  none of the above

Question 10

As long as puts are available for trading, there is little justification for constructing synthetic puts.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements about a covered call writing strategy is true?

Accepted Answer

A)  the losses are limited 
B)  return and risk are greater than that of simply holding the stock 
C)  it is a cheaper form of insurance than a protective put 
D)  it generally makes a large number of small profits 
E)  none of the above 
A)  the losses are limited 
B)  return and risk are greater than that of simply holding the stock 
C)  it is a cheaper form of insurance than a protective put 
D)  it generally makes a large number of small profits 
E)  none of the above

Question 12

What is the maximum profit on the transaction described in problem 1?

Accepted Answer

A)  $2,711 
B)  infinity 
C)  zero 
D)  $3,289 
E)  $3,000 
A)  $2,711 
B)  infinity 
C)  zero 
D)  $3,289 
E)  $3,000

Question 13

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

Accepted Answer

A) True 
 B)False

Question 14

The break-even stock price equation is similar for both calls and puts, the strike price plus the option premium.

Accepted Answer

A) True 
 B)False

Question 15

The maximum loss on a call purchase is the premium on the call.

Accepted Answer

A) True 
 B)False

Question 16

Consider the following statement related to writing a naked call option. For a given stock price, the ____________ the position is held, the more time value it loses and the ___________ the profit. Identify the correct words for these two blanks.

Accepted Answer

A)  longer, lower 
B)  longer, higher 
C)  shorter, lower 
D)  shorter, higher 
E)  longer, flatter 
A)  longer, lower 
B)  longer, higher 
C)  shorter, lower 
D)  shorter, higher 
E)  longer, flatter

Question 17

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call, whereas you must pay money for a protective put.

Accepted Answer

A) True 
 B)False

Question 18

A protective put provides the same type of profit diagram as a long call.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is the breakeven for a protective put?

Accepted Answer

A)  X + S0 - P 
B)  P + S0 
C)  X - ST 
D)  X - S0 - P 
E)  none of the above 
A)  X + S0 - P 
B)  P + S0 
C)  X - ST 
D)  X - S0 - P 
E)  none of the above

Question 20

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

Accepted Answer

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 
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

Any strategy consisting of only long options will lose money if the stock price stays the same.

What is the breakeven stock price at expiration for the transaction described in problem 6?

The difference in profit from an actual put and a synthetic put is

What is the maximum profit from the transaction described in Question 6 if the position is held to expiration?

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33. How much profit would the buyer make?

Which of the following is equivalent to a synthetic call?

An investor can construct a synthetic put by buying a call and selling short a stock.

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

Which of the following strategies has essentially the same profit diagram as a covered call?

As long as puts are available for trading, there is little justification for constructing synthetic puts.

Which of the following statements about a covered call writing strategy is true?

What is the maximum profit on the transaction described in problem 1?

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

The break-even stock price equation is similar for both calls and puts, the strike price plus the option premium.

The maximum loss on a call purchase is the premium on the call.

Consider the following statement related to writing a naked call option. For a given stock price, the __ the position is held, the more time value it loses and the _ the profit. Identify the correct words for these two blanks.

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call, whereas you must pay money for a protective put.

A protective put provides the same type of profit diagram as a long call.

Which of the following is the breakeven for a protective put?

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 6: Basic Option Strategies

Any strategy consisting of only long options will lose money if the stock price stays the same.

What is the breakeven stock price at expiration for the transaction described in problem 6?

The difference in profit from an actual put and a synthetic put is

What is the maximum profit from the transaction described in Question 6 if the position is held to expiration?

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33. How much profit would the buyer make?

Which of the following is equivalent to a synthetic call?

An investor can construct a synthetic put by buying a call and selling short a stock.

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

Which of the following strategies has essentially the same profit diagram as a covered call?

As long as puts are available for trading, there is little justification for constructing synthetic puts.

Which of the following statements about a covered call writing strategy is true?

What is the maximum profit on the transaction described in problem 1?

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

The break-even stock price equation is similar for both calls and puts, the strike price plus the option premium.

The maximum loss on a call purchase is the premium on the call.

Consider the following statement related to writing a naked call option. For a given stock price, the ____________ the position is held, the more time value it loses and the ___________ the profit. Identify the correct words for these two blanks.

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call, whereas you must pay money for a protective put.

A protective put provides the same type of profit diagram as a long call.

Which of the following is the breakeven for a protective put?

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Consider the following statement related to writing a naked call option. For a given stock price, the __ the position is held, the more time value it loses and the _ the profit. Identify the correct words for these two blanks.