Question 1

A strap is a less expensive bullish strategy than a straddle.

Accepted Answer

A) True 
 B)False

Question 2

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) $145 
B) $690 
C) $971 
D) $413 
E) none of the above 
A) $145 
B) $690 
C) $971 
D) $413 
E) none of the above

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Answer questions about a long box spread using the June 50 and 55 options.
-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 6

In a calendar spread the time value of the nearby option will decay more rapidly.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following strategies does not profit in a rising market?

Accepted Answer

A) put bull spread 
B) long straddle 
C) collar 
D) call bull spread 
E) none of the above 
A) put bull spread 
B) long straddle 
C) collar 
D) call bull spread 
E) none of the above

Question 8

Which of the following have similar profit graphs?

Accepted Answer

A) call bull spread and long box spread 
B) put bear spread and short box spread 
C) butterfly spread and ratio spread 
D) calendar spread and call bear spread 
E) none of the above 
A) call bull spread and long box spread 
B) put bear spread and short box spread 
C) butterfly spread and ratio spread 
D) calendar spread and call bear spread 
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.
-What is the maximum loss on the spread?

Accepted Answer

A) $500 
B) $698 
C) $198 
D) $802 
E) none of the above 
A) $500 
B) $698 
C) $198 
D) $802 
E) none of the above

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

To truly gain from a straddle,an investor must have a better estimate of volatility than everyone else.

Accepted Answer

A) True 
 B)False

Question 12

A call bear spread is a strategy for investors who expect stock prices to increase.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

An investor who holds a strap (2 calls and 1 put)believes the market is more likely to go up than down.

Accepted Answer

A) True 
 B)False

Question 15

Answer questions about a long straddle constructed using the June 50 options.
-What are the two breakeven stock prices at expiration?

Accepted Answer

A) $55.58 and $45.87 
B) $54.13 and $45.87 
C) $55.58 and $44.42 
D) $59.71 and $40.29 
E) none of the above 
A) $55.58 and $45.87 
B) $54.13 and $45.87 
C) $55.58 and $44.42 
D) $59.71 and $40.29 
E) none of the above

Question 16

A call butterfly spread combines a call bull spread with a call bear spread.

Accepted Answer

A) True 
 B)False

Question 17

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 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 18

Buying a put money spread is a bearish strategy.

Accepted Answer

A) True 
 B)False

Question 19

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 the spread cost?

Accepted Answer

A) -$176 
B) $176 
C) $558 
D) $105 
E) none of the above 
A) -$176 
B) $176 
C) $558 
D) $105 
E) none of the above

Question 20

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

A strap is a less expensive bullish strategy than a straddle.

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

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

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

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

In a calendar spread the time value of the nearby option will decay more rapidly.

Which of the following strategies does not profit in a rising market?

Which of the following have similar profit graphs?

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

To truly gain from a straddle,an investor must have a better estimate of volatility than everyone else.

A call bear spread is a strategy for investors who expect stock prices to increase.

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

An investor who holds a strap (2 calls and 1 put)believes the market is more likely to go up than down.

Answer questions about a long straddle constructed using the June 50 options. -What are the two breakeven stock prices at expiration?

A call butterfly spread combines a call bull spread with a call bear spread.

Buying a put money spread is a bearish strategy.

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 the spread cost?

Answer questions about a long straddle constructed using the June 50 options. -What is the profit if the position is held for 90 days and the stock price is $55?

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

A strap is a less expensive bullish strategy than a straddle.

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

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

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

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

In a calendar spread the time value of the nearby option will decay more rapidly.

Which of the following strategies does not profit in a rising market?

Which of the following have similar profit graphs?

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

To truly gain from a straddle,an investor must have a better estimate of volatility than everyone else.

A call bear spread is a strategy for investors who expect stock prices to increase.

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

An investor who holds a strap (2 calls and 1 put)believes the market is more likely to go up than down.

Answer questions about a long straddle constructed using the June 50 options. -What are the two breakeven stock prices at expiration?

A call butterfly spread combines a call bull spread with a call bear spread.

Buying a put money spread is a bearish strategy.

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 the spread cost?

Answer questions about a long straddle constructed using the June 50 options. -What is the profit if the position is held for 90 days and the stock price is $55?

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