Exam 19: Understanding Derivative Securities: Options

Listed below are the option quotes on JUP, Inc., in January of this year. Options/Strike March June March June JUP 35 31/2 4 1/2 11/8 3740 11/2 2 41/2 5 3745 1 11/2 83/8 3750 1/2 (a) Which calls are in the money? (b) Which puts are in the money? (c) Why are investors willing to pay 3 1/2 for the MARCH 35 call but only 1/2 for the March 35 put? (d) Calculate the intrinsic value of the June 35 call. (e) Calculate the intrinsic value of the March 40 put.

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Question 1

Correct Answer:

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(a) In-the-money calls are those whose EP<SP.
Since the SP = 37 only the March 35 calls is in the money.
(b) In-the-money puts are those whose EP>SP. Hence the March 40, March 45 and June 40 puts are in-the-money.
(c) The investors are willing to pay 3 1/2 for the March 35 call option because it has an intrinsic value of 2 and the rest is speculative premium. Investors are probably expecting the stock to go up by March. On the other hand, the March 35 put is out-of-the money i.e. it's intrinsic value is zero. There is still some chance that the price may drop below 35, at which time the investor may make a profit. Hence there is a small speculative premium of 1/2 on the put option.
(d) Intrinsic Value of June 35 Call = Stock Price - Exercise Price
= 37 - 35 = $2
(e) The Intrinsic Value of the March 40 put = Exercise Price - Stock Price
= 40 - 37 = $3

Put and call options on gold are considered:

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Question 2

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ABC, which closed at $151, has call options trading in April, July, and October with the following values: ---- Calls ----- Options/Strike April July October ABC 140 111/4 1 13 151150 11/2 3 4 151160 3/4 11/2 2 (a) Calculate the intrinsic value of the April 150 call. (b) Calculate the intrinsic value of the April 140 call. (c) Should the price of ABC rise to $156, what is the minimum value that the April 150 call should trade at?

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Question 3

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(a) Intrinsic value = 151 - 150 = $1.00
(b) Intrinsic value = 151 - 140 = $11
(c) Minimum value= 156 - 150 = $6

Options can be purchased on margin.

(True/False)

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Question 4

To maximize his/her potential upside returns, ceteris paribus, an investor who was bullish on a particular stock would execute which of the following options strategies:

(Multiple Choice)

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Question 5

There is an positive relationship between the price of a put option and the volatility of the underlying common stock.

(True/False)

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Question 6

According to the Black Scholes (1973) option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

(True/False)

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Question 7

What type of equity derivatives are created by corporations?

(Short Answer)

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Question 8

The __________ is NOT a determinant of the value of a call option in the Black-Scholes model?

(Multiple Choice)

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Question 9

A writer of a call can terminate the contract before expiration by:

(Multiple Choice)

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Question 10

If the price of the common stock exceeds the exercise price of a call for the holder the call is said to be

(Multiple Choice)

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Question 11

To provide insurance against declining prices on previously purchased stock, an investor could

(Multiple Choice)

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Question 12

Which of the following statements about portfolio insurance is FALSE?

(Multiple Choice)

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Question 13

An option is a wasting asset because as its expiration date approaches, its

(Multiple Choice)

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Question 14

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if the price of XYZ rises to $60 within a week.

(Essay)

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Question 15

A major difference between new shares sold by a corporation and shares sold under a call option is that:

(Multiple Choice)

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Question 16

The way to protect a stock portfolio most in a bear market is to:

(Multiple Choice)

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Question 17

The writer of a call, like the buyer of a put, is bearish about the stock price.

(True/False)

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Question 18

Which of the following is not a reason for investors to participate in options?

(Multiple Choice)

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Question 19

SCORP has puts and calls available for trading for the expiration months of June, September, and December. For the trading day May 2, 199X, SCORP closed at $40 per share. Strike prices for SCORP are $35, $40, and $45. The following prices for the 9 call options (3 expiration dates and 3 strike prices) for this date were (in scrambled order): A. $5 \quad 1/2$ F. $\quad 4\quad 7 /8$ B. 4 G. $\quad 3 / 4$ C. $2\quad1 / 16$ H. $7\quad1 / 4$ D. $6\quad3 / 8$ E. $3\quad1 / 8$ Fill in the following matrix of prices for these calls, using LETTERS ONLY (i.e., A through I) June September December \ 35 \ 40 \ 45

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Question 20

Showing 1 - 20 of 70

Put and call options on gold are considered:

Options can be purchased on margin.

To maximize his/her potential upside returns, ceteris paribus, an investor who was bullish on a particular stock would execute which of the following options strategies:

There is an positive relationship between the price of a put option and the volatility of the underlying common stock.

According to the Black Scholes (1973) option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

What type of equity derivatives are created by corporations?

The __________ is NOT a determinant of the value of a call option in the Black-Scholes model?

A writer of a call can terminate the contract before expiration by:

If the price of the common stock exceeds the exercise price of a call for the holder the call is said to be

To provide insurance against declining prices on previously purchased stock, an investor could

Which of the following statements about portfolio insurance is FALSE?

An option is a wasting asset because as its expiration date approaches, its

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if the price of XYZ rises to $60 within a week.

A major difference between new shares sold by a corporation and shares sold under a call option is that:

The way to protect a stock portfolio most in a bear market is to:

The writer of a call, like the buyer of a put, is bearish about the stock price.

Which of the following is not a reason for investors to participate in options?

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