Question 1

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 A

Question 2

Which of the following is the best strategy for an expected fall in the market?

Accepted Answer

A) long strip (2 puts and 1 call) 
B) put bull spread 
C) calendar spread 
D) butterfly spread 
E) none of the above 
A) long strip (2 puts and 1 call) 
B) put bull spread 
C) calendar spread 
D) butterfly spread 
E) none of the above A

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

A strip (2 puts and one call)would cost more than a straddle but would pay off more if the stock falls.

Accepted Answer

A) True 
 B)False

Question 5

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
-What will be the cost of the butterfly spread?

Accepted Answer

A) $1,195 
B) $637 
C) $79 
D) $1,045 
E) none of the above 
A) $1,195 
B) $637 
C) $79 
D) $1,045 
E) none of the above

Question 6

There are three breakeven stock prices in a butterfly spread.

Accepted Answer

A) True 
 B)False

Question 7

Early exercise is an important risk when call bear spreads and put bull spreads are used.

Accepted Answer

A) True 
 B)False

Question 8

Answer questions about a long box spread using the June 50 and 55 options.
-What is the net present value of the box spread?

Accepted Answer

A) $9.84 
B) $5.00 
C) $16.00 
D) $1.84 
E) none of the above 
A) $9.84 
B) $5.00 
C) $16.00 
D) $1.84 
E) none of the above

Question 9

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-Suppose you closed the spread 60 days later.What will be the profit if the stock price is still at $50?

Accepted Answer

A) $41 
B) $198 
C) $302 
D) $102 
E) none of the above
For questions 7 and 8,suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. 
A) $41 
B) $198 
C) $302 
D) $102 
E) none of the above
For questions 7 and 8,suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.

Question 10

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 (100 options) 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 11

Answer questions about a long straddle constructed using the June 50 options.
-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 12

Answer questions about a calendar spread based on the assumption that stock prices are expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of each.
-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 
A) $36 
B) $20 
C) $558 
D) -$20 
E) none of the above

Question 13

Which of the following transactions can have an unlimited loss?

Accepted Answer

A) long straddle 
B) calendar spread 
C) butterfly spread 
D) reverse box spread 
E) none of the above 
A) long straddle 
B) calendar spread 
C) butterfly spread 
D) reverse box spread 
E) none of the above

Question 14

A ratio spread can be conducted with money spreads or time spreads.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Answer questions about a long box spread using the June 50 and 55 options.
-What is the profit if the stock price at expiration is $52.50?

Accepted Answer

A) $16 
B) $500 
C) -$234 
D) $250 
E) none of the above 
A) $16 
B) $500 
C) -$234 
D) $250 
E) none of the above

Question 17

Suppose you wish to construct a ratio spread using the March and June 50 calls.You want to buy 100 June 50 call contracts.How many March 50 calls would you sell?

Accepted Answer

A) 105 
B) 95 
C) 100 
D) 57 
E) none of the above 
A) 105 
B) 95 
C) 100 
D) 57 
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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-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 19

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
-What will be the profit if the stock price at expiration is $52.50?

Accepted Answer

A) $171 
B) $1,421 
C) $1.037 
D) $421 
E) none of the above 
A) $171 
B) $1,421 
C) $1.037 
D) $421 
E) none of the above

Question 20

A collar gives downside protection,leaving the upside open.

Accepted Answer

A) True 
 B)False

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

Which of the following is the best strategy for an expected fall in the market?

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

A strip (2 puts and one call)would cost more than a straddle but would pay off more if the stock falls.

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the cost of the butterfly spread?

There are three breakeven stock prices in a butterfly spread.

Early exercise is an important risk when call bear spreads and put bull spreads are used.

Answer questions about a long box spread using the June 50 and 55 options. -What is the net present value of the box spread?

Answer questions about a long straddle constructed using the June 50 options. -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?

Answer questions about a calendar spread based on the assumption that stock prices are expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of each. -What will be the profit if the spread is held 90 days and the stock price is $45?

Which of the following transactions can have an unlimited loss?

A ratio spread can be conducted with money spreads or time spreads.

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

Answer questions about a long box spread using the June 50 and 55 options. -What is the profit if the stock price at expiration is $52.50?

Suppose you wish to construct a ratio spread using the March and June 50 calls.You want to buy 100 June 50 call contracts.How many March 50 calls would you sell?

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the profit if the stock price at expiration is $52.50?

A collar gives downside protection,leaving the upside open.

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

The 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 Applications

Managing Risk in an Organization

Filters

Exam 7: Advanced Option Strategies

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

Which of the following is the best strategy for an expected fall in the market?

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

A strip (2 puts and one call)would cost more than a straddle but would pay off more if the stock falls.

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the cost of the butterfly spread?

There are three breakeven stock prices in a butterfly spread.

Early exercise is an important risk when call bear spreads and put bull spreads are used.

Answer questions about a long box spread using the June 50 and 55 options. -What is the net present value of the box spread?

Answer questions about a long straddle constructed using the June 50 options. -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?

Answer questions about a calendar spread based on the assumption that stock prices are expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of each. -What will be the profit if the spread is held 90 days and the stock price is $45?

Which of the following transactions can have an unlimited loss?

A ratio spread can be conducted with money spreads or time spreads.

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

Answer questions about a long box spread using the June 50 and 55 options. -What is the profit if the stock price at expiration is $52.50?

Suppose you wish to construct a ratio spread using the March and June 50 calls.You want to buy 100 June 50 call contracts.How many March 50 calls would you sell?

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the profit if the stock price at expiration is $52.50?

A collar gives downside protection,leaving the upside open.

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

The 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 Applications

Managing Risk in an Organization

Filters