Question 1

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

Accepted Answer

The answer of Which of the following is not true...

Question 2

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

The call option will not be exercised because the market price is below the strike price, resulting in a loss of €1.30 (the cost of the option). 
The put option will be exercised, resulting in a profit of €0.50 (the difference between the strike price and the market price).

Therefore, the total profit or loss will be:
-€1.30 (call option loss) + €0.50 (put option profit) = -€0.80

This means a loss of €0.80, which is closest to answer choice B (-€140).

Question 3

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

The increased volatility (greater uncertainty) increases the value of the put option, while the higher share price decreases the value of the put option.

Question 4

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

Accepted Answer

The answer of What is the cost of five November...

Question 5

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 the put) = €8.90 per share. Since options are typically for 100 shares, the total profit is €8.90 * 100 = €890.

Question 6

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

Accepted Answer

Intrinsic value is the difference between the strike price and the underlying share price. In this case, the intrinsic value of the August 25 call is €30.86 - €25 = €5.86.

Question 7

You own two call option contracts on ABC with a strike price of €15.When you purchased the shares the option price was €1.20 and the share price was €15.90.What is the total intrinsic value of these options if ABC is currently selling for €14.50 a share?

Accepted Answer

The intrinsic value of a call option is the difference between the current stock price and the strike price, if the stock price is above the strike price. Since the current stock price (€14.50) is below the strike price (€15), the intrinsic value is €0.

Question 8

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 value of WXX is above the strike price of €60, it would not make sense to exercise the put option. Therefore, the profit or loss is simply the difference between the option price and the current value of the option, which is (€0.60 - €0) = €0.60. However, since one put option represents 100 underlying shares, the total profit or loss is 100 x €0.60 = €60. Therefore, the correct answer is option B.

Question 9

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 answer of You sold ten put option contracts on...

Question 10

Put-call parity can be used to show:

Accepted Answer

Put-call parity is a fundamental concept in options pricing that shows the relationship between the price of a put option and a call option with the same exercise price and expiration date. This relationship is given by the equation C + PV(X) = P + S, where C is the price of a call option, PV(X) is the present value of the exercise price, P is the price of a put option, and S is the current stock price. Put-call parity holds true for European-style options and assumes no arbitrage opportunities exist. Therefore, choice C is the correct answer. Choices A, B, D, and E are all incorrect as they are not related to put-call parity.

Question 11

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

Accepted Answer

The Black-Scholes option pricing model is dependent on five parameters: share price, exercise price, risk-free rate, variance, and time to maturity. Choice D includes all of these parameters.

Question 12

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

You received €40 from selling the put option. When the option was exercised, you had to buy the stock at €20, costing you €2000 for 100 shares. Selling the shares at €19 gives you €1900. Your total loss is €100, but after accounting for the €40 received, your net loss is €60.

Question 13

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

The profit per option is (€41.90 - €40) - €1.30 = €0.60. Since each contract represents 100 shares, the total profit is €0.60 * 100 * 6 = €360.

Question 14

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

Accepted Answer

The value of a put option is the difference between the strike price and the current stock price, only if the former is greater than the latter. In this case, the stock price is 30.86 and the strike price is 35, so the put option has an intrinsic value of 35 - 30.86 = 4.14. The market price of the put option is given as 5.10, so the total value of the contract (100 shares) is 510.

Question 15

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 net gain or loss on the investment can be calculated as follows:
Net gain/loss = (selling price - strike price) x number of contracts x option price
= (€46.05 - €40) x 10 x €0.4
= €24.2
However, since the option price is €0.4 per share, the total cost of the option contracts is €400 (10 x €0.4 x 100 shares per contract). Therefore, the net gain on the investment is:
€24.2 - €400 = -€375.8
This is a loss of €375.8, which is closest to option B (-€5,650)

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

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

An increase in the share price increases the intrinsic value of the call option, and increased volatility raises the option's value due to higher potential for profit.

Question 18

The delta of a call measures:

Accepted Answer

Delta measures the sensitivity of the option price to changes in the underlying asset price. It is the ratio of the change in option price to the change in underlying asset price. Therefore, the delta of a call option measures the swing in the price of the call option relative to the swings in the underlying asset price.

Question 19

You own five put option contracts on XYZ with an exercise price of €25.What is the total intrinsic value of these contracts if XYZ is currently selling for €24.50 a share?

Accepted Answer

The intrinsic value of a put option is calculated as the exercise price minus the current stock price. Here, it is €25 - €24.50 = €0.50 per share. Since you own five contracts, and each contract typically represents 100 shares, the total intrinsic value is €0.50 * 100 * 5 = €250.

Question 20

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.

Quiz 22: Options and Corporate Finance