Question 1

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following transactions does not profit in a strong bull market.

Accepted Answer

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

Question 3

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-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

Question 4

Buying a put is the mirror image of buying a call.

Accepted Answer

A) True 
 B)False

Question 5

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-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 6

Given two bearish investors,the more risk averse investor would tend to select a put with a higher exercise price.

Accepted Answer

A) True 
 B)False

Question 7

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Accepted Answer

A) True 
 B)False

Question 8

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-What is the breakeven stock price at expiration on the transaction described in problem 1?

Accepted Answer

A) $32.89 
B) $30.00 
C) $27.11 
D) $32.15 
E) there is no breakeven 
A) $32.89 
B) $30.00 
C) $27.11 
D) $32.15 
E) there is no breakeven

Question 9

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-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 10

Covered call writing should be considered a strategy to enhance the return on a stock.

Accepted Answer

A) True 
 B)False

Question 11

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 12

In the context of insurance,protective put buyers who choose lower exercise prices are essentially using higher deductibles.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The holder of a protective put has the equivalent of an insurance policy on the stock.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

Accepted Answer

A) True 
 B)False

Question 18

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-What is the maximum profit that the writer of a call can make?

Accepted Answer

A) $2,711 
B) $289 
C) $3,000 
D) $3,289 
E) none of the above 
A) $2,711 
B) $289 
C) $3,000 
D) $3,289 
E) none of the above

Question 19

A long put option position can be synthetically created by purchasing a call option,short selling the stock,and purchasing a pure discount bond with face value equal to the strike price.

Accepted Answer

A) True 
 B)False

Question 20

To reach breakeven on a call purchase held to expiration,the stock price must exceed the exercise price by at least the amount of the call premium.

Accepted Answer

A) True 
 B)False

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Which of the following transactions does not profit in a strong bull market.

Buying a put is the mirror image of buying a call.

Given two bearish investors,the more risk averse investor would tend to select a put with a higher exercise price.

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Covered call writing should be considered a strategy to enhance the return on a stock.

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.

In the context of insurance,protective put buyers who choose lower exercise prices are essentially using higher deductibles.

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

The holder of a protective put has the equivalent of an insurance policy on the stock.

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

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

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

A long put option position can be synthetically created by purchasing a call option,short selling the stock,and purchasing a pure discount bond with face value equal to the strike price.

To reach breakeven on a call purchase held to expiration,the stock price must exceed the exercise price by at least the amount of the call premium.

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

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

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Which of the following transactions does not profit in a strong bull market.

Buying a put is the mirror image of buying a call.

Given two bearish investors,the more risk averse investor would tend to select a put with a higher exercise price.

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Covered call writing should be considered a strategy to enhance the return on a stock.

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.

In the context of insurance,protective put buyers who choose lower exercise prices are essentially using higher deductibles.

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

The holder of a protective put has the equivalent of an insurance policy on the stock.

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

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

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

A long put option position can be synthetically created by purchasing a call option,short selling the stock,and purchasing a pure discount bond with face value equal to the strike price.

To reach breakeven on a call purchase held to expiration,the stock price must exceed the exercise price by at least the amount of the call premium.

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

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.