Question 1

A synthetic long call position can be created with which of the following sets of transactions.

Accepted Answer

A) borrow the present value of the strike price,sell stock,sell put 
B) lend the present value of the strike price,sell stock,buy put 
C) sell put,buy stock,lend the present value of the strike price 
D) buy stock,buy put,borrow the present value of the strike price 
E) none of the above creates a synthetic long call position 
A) borrow the present value of the strike price,sell stock,sell put 
B) lend the present value of the strike price,sell stock,buy put 
C) sell put,buy stock,lend the present value of the strike price 
D) buy stock,buy put,borrow the present value of the strike price 
E) none of the above creates a synthetic long call position

Question 2

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.
-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 3

Consider the following statement related to buying a put option.For a given stock price,the ____________ the position is held,the more time value it loses and the ___________ the profit;however,an exception can occur when the stock price is ___________.Identify the correct words for these two blanks.

Accepted Answer

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

Question 4

Consider two put options differing only by exercise price.The one with the higher exercise price has

Accepted Answer

A) the lower breakeven and lower profit potential 
B) the lower breakeven and greater profit potential 
C) the higher breakeven and greater profit potential 
D) the higher breakeven and lower profit potential 
E) the greater premium and lower profit potential 
A) the lower breakeven and lower profit potential 
B) the lower breakeven and greater profit potential 
C) the higher breakeven and greater profit potential 
D) the higher breakeven and lower profit potential 
E) the greater premium and lower profit potential

Question 5

A synthetic short put position can be created with which of the following sets of transactions.

Accepted Answer

A) borrow the present value of the strike price,sell stock,sell call 
B) lend the present value of the strike price,sell stock,buy call 
C) sell call,buy stock,lend the present value of the strike price 
D) buy stock,buy call,borrow the present value of the strike price 
E) none of the above creates a synthetic long call position 
A) borrow the present value of the strike price,sell stock,sell call 
B) lend the present value of the strike price,sell stock,buy call 
C) sell call,buy stock,lend the present value of the strike price 
D) buy stock,buy call,borrow the present value of the strike price 
E) none of the above creates a synthetic long call position

Question 6

Early exercise imposes a risk to all but one of the following transactions.

Accepted Answer

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

Question 7

Selling a put is a bullish strategy that has a limited gain (the premium)and a large,but limited,potential loss.

Accepted Answer

A) True 
 B)False

Question 8

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 9

A covered call with a higher exercise price has a higher breakeven.

Accepted Answer

A) True 
 B)False

Question 10

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.
-If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36,what is the investor's profit?

Accepted Answer

A) $600 
B) $311 
C) $889 
D) $229 
E) none of the above 
A) $600 
B) $311 
C) $889 
D) $229 
E) none of the above

Question 11

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

Question 12

Each of the following is a bullish strategy except

Accepted Answer

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

Question 13

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?

Accepted Answer

A) the profit is greater at all stock prices 
B) the profit is greater only at low stock prices 
C) the profit is greater only at high stock prices 
D) the range of possible profits is greater 
E) none of the above are true 
A) the profit is greater at all stock prices 
B) the profit is greater only at low stock prices 
C) the profit is greater only at high stock prices 
D) the range of possible profits is greater 
E) none of the above are true

Question 14

A protective put can be profitable during a bull market,while a covered call is profitable only in a bear market.

Accepted Answer

A) True 
 B)False

Question 15

The breakeven for a protective put is the same as that for a covered call.

Accepted Answer

A) True 
 B)False

Question 16

Both call and put writers have the potential for unlimited losses.

Accepted Answer

A) True 
 B)False

Question 17

The following is the profit equation for a put option: Π = NP[Max(0,X - ST)+ P].

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 your profit if you buy a call,hold it to expiration and the stock price at expiration is $37?

Accepted Answer

A) $700 
B) -$289 
C) $2,711 
D) $411 
E) none of the above 
A) $700 
B) -$289 
C) $2,711 
D) $411 
E) none of the above

Question 19

Which of the following investors may be obligated to buy stock?

Accepted Answer

A) covered call writer 
B) call buyer 
C) put writer 
D) protective put buyer 
E) none of the above 
A) covered call writer 
B) call buyer 
C) put writer 
D) protective put buyer 
E) none of the above

Question 20

A covered call writer will make a lower profit if the option is exercised early.

Accepted Answer

A) True 
 B)False

A synthetic long call position can be created with which of the following sets of transactions.

Consider the following statement related to buying a put option.For a given stock price,the ______ the position is held,the more time value it loses and the _ the profit;however,an exception can occur when the stock price is _______.Identify the correct words for these two blanks.

Consider two put options differing only by exercise price.The one with the higher exercise price has

A synthetic short put position can be created with which of the following sets of transactions.

Early exercise imposes a risk to all but one of the following transactions.

Selling a put is a bullish strategy that has a limited gain (the premium)and a large,but limited,potential loss.

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

A covered call with a higher exercise price has a higher breakeven.

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

Each of the following is a bullish strategy except

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?

A protective put can be profitable during a bull market,while a covered call is profitable only in a bear market.

The breakeven for a protective put is the same as that for a covered call.

Both call and put writers have the potential for unlimited losses.

The following is the profit equation for a put option: Π = N_P[Max(0,X - S_T)+ P].

Which of the following investors may be obligated to buy stock?

A covered call writer will make a lower profit if the option is exercised early.

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 synthetic long call position can be created with which of the following sets of transactions.

Consider two put options differing only by exercise price.The one with the higher exercise price has

A synthetic short put position can be created with which of the following sets of transactions.

Early exercise imposes a risk to all but one of the following transactions.

Selling a put is a bullish strategy that has a limited gain (the premium)and a large,but limited,potential loss.

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

A covered call with a higher exercise price has a higher breakeven.

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

Each of the following is a bullish strategy except

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?

A protective put can be profitable during a bull market,while a covered call is profitable only in a bear market.

The breakeven for a protective put is the same as that for a covered call.

Both call and put writers have the potential for unlimited losses.

The following is the profit equation for a put option: Π = NP[Max(0,X - ST)+ P].

Which of the following investors may be obligated to buy stock?

A covered call writer will make a lower profit if the option is exercised early.

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

The following is the profit equation for a put option: Π = N_P[Max(0,X - S_T)+ P].