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CLASS / COURSE: Finance

QUESTION DESCRIPTION:

1) An American put option can be exercised

A)any time on or before the expiration date.

B)only on the expiration date.

C)any time in the indefinite future.

D)only after dividends are paid.

2) The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call

A)is out of the money.

B)is in the money.

C)can be exercised profitably.

D)A and C.

3) You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position?

A)$65

B)$75

C)$5

D)$70

4) Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________.

A)increase; increase

B)decrease; increase

C)increase; decrease

D)decrease; decrease

5) A protective put strategy is

A)a long put plus a long position in the underlying asset.

B)a long put plus a long call on the same underlying asset.

C)a long call plus a short put on the same underlying asset.

D)a long put plus a short call on the same underlying asset.

6) All of the following factors affect the price of a stock option except

A)the risk-free interest rate.

B)the strike price of the option.

C)the time to expiration.

D)the required return on equity.

7) The value of a stock put option is positively related to the following factors except

A)the time to expiration.

B)the strike price.

C)the stock price.

D)all of the above.

8) A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?

A)+$700

B)-$850

C)-$580

D)-$520

Questions 9 and 10 are based on the following information:

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14.

9) What is the intrinsic value of the call?

A)$12

B)$10

C)$8

D)$23

10)What is the time value of the call?

A)$8

B)$12

C)$6

D)$4

11)IBM is trading at $72 per share today. Under a binomial setting, its price can either go up to $100 in a good economy or go down to $60 per share in a bad economy next year. For simplicity, let's assume the interest rate on T-Bill is zero. What's the premium for a call option with a strike price of $80?

A)$3

B)$4

C)$5

D)$6

Questions 12, 13, and 14 are based on the 12/01/2008 Wall Street

Journal article to the right:

12)Which option strategy we learned in class is the most related

to this article?

A)Protective puts

B)Covered calls

C)Straddles

D)Collars

13)Under what market condition would a "buy-write" mutual

fund underperform the market?

A)A strong bull market

B)A flat market

C)A bear market

D)A crashing market

14)Which investors should pursue this buy-write strategy?

A)Investors seeking high risk and high return

B)Investors believing the market will go down for sure

C)Investors demanding a steady income while enjoying

the high expected return from the equity market

D)Investors hoping to get rich quickly in the next bull market

15) The writer of a put option ________________.

A)agrees to sell shares at a set price

B)agrees to buy shares at a set price

C)has a right to buy shares at a set price

D)has a right to sell shares at a set price

16) GE's current stock price is $118 and the GE December 120 put option is currently quoted at $4.5 on E*Trade. You place an order with E*Trade to buy one contract of this GE put option. You expect to pay ______ plus the broker’s commission for this purchase.

A)$120

B)$4.5

C)$118

D)$450

17)Schwab's current price is $40. A Schwab December 35 call is quoted at $5.5. The time value of the option is ____________

A)$5

B)$5.5

C)$0.5

D)$0

18)A portfolio consists of two (long) calls. The call option’s delta = 0.6. If the share price of the underlying stock of the call drops by $0.4, then the change in the portfolio value is equal to

A)$0.24

B)-$0.24

C)$0.48

D)-$0.48

19)The delta of a MSFT call is 0.6 and the delta of a MSFT put is -0.5. Consider a straddle that consists of these two MSFT options. The delta of a __short__ position in this straddle is _________.

A)0.1

B)0.55

C)-0.1

D)1.1

20)An investor is bearish on a particular stock and decided to long a put with a strike price of $25. If the option was purchased for a price of $0.87, what is the breakeven point for the investor?

A)$24.13

B)$25.00

C)$25.87

D)$27.86

21)A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple is $34.25. The put option is __________.

A)at the money

B)in the money

C)out of the money

D)none of the above

22)You purchase one Yahoo December 35 call option for a premium of $5. You hold the option until the expiration date when Yahoo stock sells for $33 per share. You will realize a ______ on the investment.

A)$2 loss

B)$2 profit

C)$7 loss

D)$5 loss

23)Suppose you purchase one Texas Instruments August 75 call option quoted at $8.50 and __write__ one Texas Instruments August 80 call option quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profits/losses would be __________.

A)$1.50

B)$4.00

C)$2.50

D)$18.50

24)You buy one Merrill August 50 call contract and one Merrill August 50 put contract. The call premium is $4.25 and the put premium is $4.50. Your strategy is useful if you believe that the stock price __________.

A)will be lower than $41.25 in August

B)will be between $41.25 and $58.75 in August

C)will be higher than $58.75 in August

D)either a or c

25)A Google executive owns a significant amount of the Google stock. The stock is currently trading at $700/share. What strategy can he use to ensure that the value of his portfolio is between $500 and $900 per share?

A)Protective put

B)Collar

C)Covered Call

D)Straddle

SOLUTION DESCRIPTION:
Completed Solution is attached. Click on Buy button and then download file to get full solution.

SUBJECTS / CATEGORIES:

1. Finance

2. Financial Management

3. Investment and Portfolio Management

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