Question 1

Which of the following is not true concerning call option writers?

Accepted Answer

The writer of a call option has the obligation, not the option, to sell shares if the option is exercised by the buyer. This is a fundamental aspect of writing call options, contrasting with the rights of the buyer, who has the option but not the obligation to buy.

Question 2

Tele-Tech Com announces a major expansion into Internet services.This announcement causes the price of Tele-Tech Com share to increase, but also causes an increase in price volatility of the share.
Which of the following correctly identiﬁes the impact of these changes on the call option of Tele-
Tech Com?

Accepted Answer

The price of a call option increases with the underlying stock price due to the direct relationship between the two. Additionally, increased volatility (uncertainty) also increases the value of options, including call options, because there's a higher chance of the option ending in the money.

Question 3

You sold ten put option contracts on PLT with an exercise price of €32.50 and an option price of €1.10.Today, the option expires and the underlying share is selling for €34.30 a share.Ignoring
Trading costs and taxes, what is your total proﬁt or loss onthis investment?

Accepted Answer

The seller of a put option receives the option price as premium and incurs the obligation to purchase the underlying asset at the exercise price if the option is exercised. 
In this case, you sold 10 put option contracts at €1.10 per contract, for a total premium of €1.10 x 10 x 100 = €1,100. 
Since the option expired and the underlying shares are selling for €34.30, which is above the exercise price of €32.50, the option was not exercised and you do not have to buy the shares. 
Therefore, your total profit is the premium received of €1,100. 
Hence, the correct choice is D).

Question 4

You wrote ten call option contracts on JIG with a strike price of €40 and an option price of €.40. What is your net gain or loss on this investment if the price of JIG is €46.05 on the option expiration
Date?

Accepted Answer

The answer of You wrote ten call option contracts on...

Question 5

You sold a put contract on EDF at an option price of €.40.The option had an exercise price of €20. The option was exercised.Today, EDF is selling for €19 a share.What is your total proﬁt or loss on
All of your transactions related to EDF assuming that you close out your positions in this share
Today? Ignore transaction costs and taxes.

Accepted Answer

Since the option was exercised, you must buy the stock at the exercise price of €20, even though it is currently selling for €19. This means you have a loss of €1 per share. However, you received €0.40 for selling the put contract, which offsets some of your losses. Therefore, your total loss per share is €0.60. Since options contracts are typically for 100 shares, your total loss is €60.

Question 6

Several rumours concerning Wyslow have started circulating.These rumours are causing the market price of the share to be quite volatile.Given this situation, you decide to buy both a one-
Month put and a call option on this share with an exercise price of €15.You purchased the call at a
Quoted price of €.20 and the put at a price of €2.10.What will be your total proﬁt or loss on these
Option positions if the share price is €4 on the day the options expire?

Accepted Answer

The call option will expire worthless since the share price (€4) is below the exercise price (€15). The put option will be exercised, giving a profit of (€15 - €4) = €11 per share. The total profit from the put is €11 - €2.10 (cost of put) = €8.90 per share. Since the call cost €0.20, the net profit per share is €8.90 - €0.20 = €8.70. Assuming 100 shares per option, the total profit is €870.

Question 7

Tele-Tech Com announces a major expansion into Internet services.This announcement causes the price of Tele-Tech Com share to increase, but also causes an increase in price volatility of the share.
Which of the following correctly identiﬁes the impact of these changes on the put option of Tele-
Tech Com?

Accepted Answer

Increased price volatility (greater uncertainty) generally increases the value of options, including put options, because there's a higher chance of the option ending in the money. However, an increase in the underlying share price typically decreases the value of put options, as they give the holder the right to sell shares at a predetermined price, which becomes less attractive if the market price is higher.

Question 8

You purchased six TJH call option contracts with a strike price of €40 when the option was quoted at €1.30.The option expires today when the value of TJH is €41.90.Ignoring trading costs and
Taxes, what is your total proﬁt or loss on your investment?

Accepted Answer

Total cost of purchasing 6 contracts at €1.30 each = 6 x €1.30 = €7.80
Total cost paid = 6 x 100 x €40 = €24,000
Total revenue earned = 6 x 100 x €41.90 = €25,140
Profit = Total Revenue - Total Cost Paid - Total Cost of Purchasing Contracts = €25,140 - €24,000 - €7.80 = €360

Question 9

What is the intrinsic value of the August 25 call? $$\begin{array}{l}
\text { KNJ (KNJ) Underlying share price: } 30.86\
\begin{array} { | l | l | l | l | } 
\hline & & \text { Call } & \text { Put } \
\hline \text { Expiration } & \text { Strike } & \text { Last } & \text { Last } \
\hline \text { Aug } & 25 & 6.15 & .05 \
\hline \text { Nov } & 25 & 6.60 & 10 \
\hline \text { Aug } & 35 & 10 & 4.60 \
\hline \text { Nov } & 35 & 70 & 5.10 \
\hline
\end{array}
\end{array}$$

Accepted Answer

The intrinsic value of a call option is calculated as the current underlying share price minus the strike price, provided this value is positive (otherwise, it's 0). For the August 25 call, the intrinsic value is $30.86 - 25 = 5.86$.

Question 10

Three months ago, you purchased a put option on WXX with a strike price of £60 and an option price of £.60.The option expires today when the value of WXX is £62.50.Ignoring trading costs and
Taxes, what is your total proﬁt or loss on your investment?

Accepted Answer

Since the option was a put option, you would exercise it if the value of WXX was below the strike price of £60. However, since the value of WXX is actually £62.50, you would not exercise the option and it would expire worthless. Therefore, your total loss would be just the initial option price of £0.60. Thus, the total profit or loss on the investment is -£0.60 or -£60.

Question 11

The market price of ABC has been very volatile and you think this volatility will continue for a few weeks.Thus, you decide to purchase a one-month call option contract on ABC share with a strike
Price of €25 and an option price of €1.30.You also purchase a one-month put option on ABC with a
Strike price of €25 and an option price of €.50.What will be your total proﬁt or loss on these option
Positions if the share price is €24.60 on the day the options expire?

Accepted Answer

If the share price is €24.60 on the day the options expire, the call option will not be exercised because the strike price is higher than the share price. Therefore, the loss on the call option will be the premium paid of €1.30. 
On the other hand, the put option will be exercised as the strike price is higher than the share price. So the profit on the put option will be the difference between the strike price and the share price, minus the premium paid. 
Profit on put option = (€25 - €24.60) - €0.50 = €0.90 
Thus, the total profit or loss will be: 
Total profit/loss = Profit on put option - Loss on call option 
Total profit/loss = €0.90 - €1.30 = -€0.40 
Hence, the best choice is B, a loss of €140.

Question 12

An in-the-money put option is one that:

Accepted Answer

An in-the-money put option is one where the exercise price (strike price) is greater than the underlying share price, meaning the holder can sell the underlying asset at a higher price than its current market value.

Question 13

An out-of-the-money call option is one that:

Accepted Answer

An out-of-the-money call option has an exercise price above the current market price of the underlying security, making it not beneficial to exercise at the moment.

Question 14

Put-call parity can be used to show:

Accepted Answer

Put-call parity is a relationship between the price of a European call option and a European put option, both with the same exercise price and expiration date, and thus can be used to show the precise relationship between put and call prices given those conditions. It does not refer to how far in-the-money options can get, nor does it dictate that the value of a call option is always twice or half that of a put option given equal exercise prices and expiration dates.

Question 15

The delta of a call measures:

Accepted Answer

Delta measures the sensitivity of an option's price to changes in the underlying asset's price. It is the ratio of the change in the price of the option to the change in the price of the underlying asset. Delta for a call option is positive and ranges from 0 to 1, representing the percentage change in the price of the call option for a 1% change in the price of the underlying asset. Therefore, the delta of a call option measures the swing in the price of the call option relative to the swing in the share price.

Question 16

You purchased four WXO 30 call option contracts at a quoted price of €.34.What is your net gain or loss on this investment if the price of WXO is €33.60 on the option expiration date?

Accepted Answer

The answer of You purchased four WXO 30 call option...

Question 17

What is the cost of ﬁve November 25 call option contracts on KNJ given the following price quotes? 
KNJ (KNJ) Underlying share price: 30.86 $$\begin{array} { | l | l | l | l | } 
\hline & & \text { Call } & \text { Put } \
\hline \text { Expiration } & \text { Strike } & \text { Last } & \text { Last } \
\hline \text { Aug } & 25 & 6.15 & .05 \
\hline \text { Nov } & 25 & 6.60 & 10 \
\hline \text { Aug } & 35 & 10 & 4.60 \
\hline \text { Nov } & 35 & 70 & 5.10 \
\hline
\end{array}$$

Accepted Answer

The cost of one November 25 call option contract is given as €6.60. Since each standard option contract typically represents 100 shares, the cost for one contract is €6.60 * 100 = €660. Therefore, for five contracts, the cost is €660 * 5 = €3,300.

Question 18

Which of the following statements is true?

Accepted Answer

At expiration, the value of a call option is the greater of (Share Price - Exercise Price) or 0, because a call option gives the holder the right to buy shares at the exercise price. If the share price is above the exercise price, the call has value. Conversely, the value of a put option is the greater of (Exercise Price - Share Price) or 0, because a put option gives the holder the right to sell shares at the exercise price. If the share price is below the exercise price, the put has value. Therefore, both statements A and D are correct.

Question 19

The Black-Scholes option pricing model is dependent on which ﬁve parameters?

Accepted Answer

The Black-Scholes option pricing model is dependent on the share price, exercise price, risk-free rate, variance, and time to maturity. Option pricing models need to take into account the current stock price (share price), the price at which an option can be exercised (exercise price), the time left to expiration (time to maturity), the risk-free interest rate (risk-free rate), and the volatility of the underlying asset (variance). Choice D correctly includes all of these parameters.

Question 20

What is the value of one November 35 put contract? $$\begin{array}{l}
\text { KNJ (KNJ) Underlying share price: } 30.86\
\begin{array} { | l | l | l | l | } 
\hline & & \text { Call } & \text { Put } \
\hline \text { Expiration } & \text { Strike } & \text { Last } & \text { Last } \
\hline \text { Aug } & 25 & 6.15 & .05 \
\hline \text { Nov } & 25 & 6.60 & 10 \
\hline \text { Aug } & 35 & 10 & 4.60 \
\hline \text { Nov } & 35 & .70 & 5.10 \
\hline
\end{array}
\end{array}$$

Accepted Answer

The value of a put option contract is calculated by subtracting the strike price from the current stock price and multiplying the result by the number of shares in the contract (usually 100). In this case, the November 35 put has a last price of 5.10, which means the contract is worth 5.10 x 100 = 510 euros.

Quiz 22: Options and Corporate Finance

Which of the following is not true concerning call option writers?

You sold ten put option contracts on PLT with an exercise price of €32.50 and an option price of €1.10.Today, the option expires and the underlying share is selling for €34.30 a share.Ignoring Trading costs and taxes, what is your total proﬁt or loss onthis investment?

You wrote ten call option contracts on JIG with a strike price of €40 and an option price of €.40. What is your net gain or loss on this investment if the price of JIG is €46.05 on the option expiration Date?

You purchased six TJH call option contracts with a strike price of €40 when the option was quoted at €1.30.The option expires today when the value of TJH is €41.90.Ignoring trading costs and Taxes, what is your total proﬁt or loss on your investment?

Three months ago, you purchased a put option on WXX with a strike price of £60 and an option price of £.60.The option expires today when the value of WXX is £62.50.Ignoring trading costs and Taxes, what is your total proﬁt or loss on your investment?