Question 1

What is the cost of the box spread?

Accepted Answer

A)  $500 
B)  $2,018 
C)  $76 
D)  $484 
E)  none of the above 
A)  $500 
B)  $2,018 
C)  $76 
D)  $484 
E)  none of the above

Question 2

"Like the butterfly spread, the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?

Accepted Answer

A)  volatility 
B)  expected rate of return 
C)  beta 
D)  correlation with the benchmark index 
E)  skewness 
A)  volatility 
B)  expected rate of return 
C)  beta 
D)  correlation with the benchmark index 
E)  skewness

Question 3

Suppose the investor adds a call to the long straddle, a transaction known as a strap. What will this do to the breakeven stock prices?

Accepted Answer

A)  lower both the upside and downside breakevens 
B)  raise both the upside and downside breakevens 
C)  raise the upside and lower the downside breakevens 
D)  lower the upside and raise the downside breakevens 
E)  none of the above 
A)  lower both the upside and downside breakevens 
B)  raise both the upside and downside breakevens 
C)  raise the upside and lower the downside breakevens 
D)  lower the upside and raise the downside breakevens 
E)  none of the above

Question 4

What is the profit if the stock price at expiration is $47?

Accepted Answer

A)  -$102 
B)  $398 
C)  -$302 
D)  $500 
E)  none of the above 
A)  -$102 
B)  $398 
C)  -$302 
D)  $500 
E)  none of the above

Question 5

What is the profit if the position is held for 90 days and the stock price is $55?

Accepted Answer

A)  -$971 
B)  -$58 
C)  -$109 
D)  -$471 
E)  none of the above 
A)  -$971 
B)  -$58 
C)  -$109 
D)  -$471 
E)  none of the above

Question 6

What is the maximum profit on the spread?

Accepted Answer

A)  $500 
B)  $802 
C)  $198 
D)  $302 
E)  none of the above 
A)  $500 
B)  $802 
C)  $198 
D)  $302 
E)  none of the above

Question 7

What will be the profit if the spread is held 90 days and the stock price is $45?

Accepted Answer

A)  $36 
B)  $20 
C)  $558 
D)  -$20 
E)  none of the above
Answer questions 12 through 17 about a long straddle constructed using the June 50 options. 
A)  $36 
B)  $20 
C)  $558 
D)  -$20 
E)  none of the above
Answer questions 12 through 17 about a long straddle constructed using the June 50 options.

Question 8

The option strategy where the holder of a long position in a stock buys a put with an exercise price lower than the current stock price and sells a call with an exercise price higher than the current stock price is known as

Accepted Answer

A)  box 
B)  bear strategy 
C)  bull strategy 
D)  collar 
E)  spread 
A)  box 
B)  bear strategy 
C)  bull strategy 
D)  collar 
E)  spread

Question 9

At the expiration of a box spread, at most there will be only one option exercised.

Accepted Answer

A) True 
 B)False

Question 10

What is the breakeven point?

Accepted Answer

A)  $48.02 
B)  $41.98 
C)  $55.66 
D)  $50.00 
E)  none of the above 
A)  $48.02 
B)  $41.98 
C)  $55.66 
D)  $50.00 
E)  none of the above

Question 11

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is ST - S0 - P1 + C2 where X2 > X1.

Accepted Answer

A) True 
 B)False

Question 12

A reverse calendar spread is used to take advantage of unexpected high volatility.

Accepted Answer

A) True 
 B)False

Question 13

One of the risks of a calendar spread is that the intrinsic values may be different.

Accepted Answer

A) True 
 B)False

Question 14

A box spread is a good strategy to use if high volatility is expected.

Accepted Answer

A) True 
 B)False

Question 15

A box spread is a combination of a call bull spread and a put bear spread.

Accepted Answer

A) True 
 B)False

Question 16

A call butterfly spread is a bullish strategy that is profitable if stock prices increase.

Accepted Answer

A) True 
 B)False

Question 17

Early exercise is a disadvantage in which of the following transactions?

Accepted Answer

A)  short box spread 
B)  put bear spread 
C)  long strip (2 puts and 1 call) 
D)  long strap (2 calls and 1 put) 
E)  none of the above 
A)  short box spread 
B)  put bear spread 
C)  long strip (2 puts and 1 call) 
D)  long strap (2 calls and 1 put) 
E)  none of the above

Question 18

The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices.
   Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-How much will the spread cost?

Accepted Answer

A)  $986 
B)  $302 
C)  $283 
D)  $193 
E)  none of the above 
A)  $986 
B)  $302 
C)  $283 
D)  $193 
E)  none of the above

Question 19

What is the profit if the stock price at expiration is at $64.75?

Accepted Answer

A)  -$971 
B)  $1,475 
C)  -$3,525 
D)  $500 
E)  none of the above 
A)  -$971 
B)  $1,475 
C)  -$3,525 
D)  $500 
E)  none of the above

Question 20

A spread option strategy is a transaction in one option and an opposite transaction in the underlying instrument.

Accepted Answer

A) True 
 B)False

What is the cost of the box spread?

"Like the butterfly spread, the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?

Suppose the investor adds a call to the long straddle, a transaction known as a strap. What will this do to the breakeven stock prices?

What is the profit if the stock price at expiration is $47?

What is the profit if the position is held for 90 days and the stock price is $55?

What is the maximum profit on the spread?

What will be the profit if the spread is held 90 days and the stock price is $45?

The option strategy where the holder of a long position in a stock buys a put with an exercise price lower than the current stock price and sells a call with an exercise price higher than the current stock price is known as

At the expiration of a box spread, at most there will be only one option exercised.

What is the breakeven point?

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is S_T - S₀ - P₁ + C₂ where X₂ > X₁.

A reverse calendar spread is used to take advantage of unexpected high volatility.

One of the risks of a calendar spread is that the intrinsic values may be different.

A box spread is a good strategy to use if high volatility is expected.

A box spread is a combination of a call bull spread and a put bear spread.

A call butterfly spread is a bullish strategy that is profitable if stock prices increase.

Early exercise is a disadvantage in which of the following transactions?

What is the profit if the stock price at expiration is at $64.75?

A spread option strategy is a transaction in one option and an opposite transaction in the underlying instrument.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic 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 7: Advanced Option Strategies

What is the cost of the box spread?

"Like the butterfly spread, the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?

Suppose the investor adds a call to the long straddle, a transaction known as a strap. What will this do to the breakeven stock prices?

What is the profit if the stock price at expiration is $47?

What is the profit if the position is held for 90 days and the stock price is $55?

What is the maximum profit on the spread?

What will be the profit if the spread is held 90 days and the stock price is $45?

The option strategy where the holder of a long position in a stock buys a put with an exercise price lower than the current stock price and sells a call with an exercise price higher than the current stock price is known as

At the expiration of a box spread, at most there will be only one option exercised.

What is the breakeven point?

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is ST - S0 - P1 + C2 where X2 > X1.

A reverse calendar spread is used to take advantage of unexpected high volatility.

One of the risks of a calendar spread is that the intrinsic values may be different.

A box spread is a good strategy to use if high volatility is expected.

A box spread is a combination of a call bull spread and a put bear spread.

A call butterfly spread is a bullish strategy that is profitable if stock prices increase.

Early exercise is a disadvantage in which of the following transactions?

What is the profit if the stock price at expiration is at $64.75?

A spread option strategy is a transaction in one option and an opposite transaction in the underlying instrument.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic 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

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is S_T - S₀ - P₁ + C₂ where X₂ > X₁.