Question 1

Use the figure for the question(s)below. 
-You pay $4.75 for a call option on Vartan Industries that expires in six months with an exercise price of $45.00. Six months later, at expiration, Vartan Industries is trading at $47.00 per share. Your profit per share on this transaction is closest to:

Accepted Answer

The answer of Use the figure for the question(s)below. 
-You...

Question 2

Suppose that a share of Callidus Corp sells at a price of $45 on the expiration date. Compute the payoff to the seller of a call option if the exercise price is $40.

Accepted Answer

The payoff for a call option is calculated as the difference between the stock price at expiration and the exercise price. In this case, the stock price is $45 and the exercise price is $40, so the payoff is $45 - $40 = $5. However, since the seller (or writer) of the call option is obligated to sell the stock at the exercise price, the payoff is negative, resulting in a loss of $5. Therefore, the correct answer is (A) -$5.

Question 3

Use the figure for the question(s)below. 
-You have shorted a call option on WSJ stock with an exercise price of $50. The option will expire in exactly six months. If the share is trading at $60 in three months, what will you owe for each share in the contract?

Accepted Answer

Since you have shorted a call option, if the stock price goes above the exercise price, you will have to buy shares at the market price and sell them at the exercise price, resulting in a loss. In this scenario, the stock price is $60, which is $10 above the exercise price of $50, and there are three months until expiration. This means there is still time for the stock price to increase further and your potential loss to increase as well. Therefore, you will owe $10 for each share in the contract.

Question 4

Use the figure for the question(s)below. 
-This graph depicts the payoffs of

Accepted Answer

A long position in a put option at expiration means that the holder of the option has the right, but not the obligation, to sell the underlying asset at a specified price (the strike price) on or before a specified date (the expiration date). If the price of the underlying asset falls below the strike price, the holder of the put option will exercise the option and sell the asset at the strike price, thereby making a profit. The graph depicts this payoff structure, as the payoff increases as the price of the underlying asset falls below the strike price.

Question 5

Suppose that a share of Callidus Corp sells at a price of $50 on the expiration date. Compute the price of a put option if the exercise price is $50.

Accepted Answer

At the expiration date, if the share price equals the exercise price ($50 in this case), the put option will expire worthless because the holder would not exercise the option to sell shares at the market price when they could simply sell them in the market for the same price. Therefore, the price of the put option would be $0.

Question 6

Suppose that a share of Callidus Corp sells at a price of $45 on the expiration date. Compute the payoff to the seller of a call option if the exercise price is $45.

Accepted Answer

If the share price on the expiration date is exactly equal to the exercise price, then the option is said to be at the money, and the seller of the call option will not make any profit or loss. Thus, the payoff to the seller of a call option with an exercise price of $45 when the share price on the expiration date is $45 is $0.

Question 7

The payoff to the holder of a put option is given by

Accepted Answer

A put option gives the holder the right to sell an asset at a specified strike price (K), so the payoff is the maximum of either the strike price minus the stock price (K - S) or 0, if exercising the option is not profitable.

Question 8

Suppose that a share of Callidus Corp sells at a price of $50 on the expiration date. Compute the price of a put option if the exercise price is $45.

Accepted Answer

A put option gives the holder the right to sell a stock at the exercise price. If the stock price ($50) is above the exercise price ($45), the option is out of the money and has no intrinsic value, so its price is $0.

Question 9

Suppose you purchase a call option for $5 and an exercise price of $20. On the expiration day, the price of the share is $30. What is the return on the call option if you hold your position until maturity?

Accepted Answer

The payoff for the call option is the difference between the share price and the exercise price, which is $10 ($30 - $20). Since you paid $5 for the option, your profit is $5. Therefore, the return on the call option is (profit/cost) x 100% = ($5/$5) x 100% = 100%.

Question 10

Suppose that a share of Callidus Corp sells at a price of $30 on the expiration date. Compute the payoff to the seller of a call option if the exercise price is $40.

Accepted Answer

Since the share price ($30) is below the exercise price ($40), the call option will not be exercised, resulting in a payoff of $0 to the seller.

Question 11

An investor purchases a call option and its underlying share on the same day. If the share appreciates by 25%, the call option will appreciate by

Accepted Answer

When the underlying share appreciates, the call option will also appreciate because of its intrinsic value. However, because of the leverage effect of options, the appreciation of the call option will be greater than the appreciation of the underlying share. Therefore, the call option will appreciate more than 25%.

Question 12

Suppose that a share of Callidus Corp sells at a price of $45 on the expiration date. Compute the payoff to the seller of a put option if the exercise price is $45.

Accepted Answer

If the share price is equal to the exercise price, then the put option will not be exercised and the seller will not receive any payoff. Therefore, the payoff is 0.

Question 13

Suppose that a share of Callidus Corp sells at a price of $30 on the expiration date. Compute the payoff to the seller of a put option if the exercise price is $45.

Accepted Answer

The payoff to the seller of a put option is negative when the share price is below the exercise price, as the buyer will exercise the option. The payoff is calculated as the exercise price minus the share price, which is $45 - $30 = $15. Since the seller has to buy the share at the exercise price, it's a loss, hence -$15.

Question 14

The payoff to the holder of a call option is given by

Accepted Answer

The payoff to the holder of a call option is given by the formula C = max(S - K, 0), where S is the spot price of the underlying asset at expiration and K is the strike price of the option. This means the holder will exercise the option to buy the asset only if S > K, making a profit of S - K; otherwise, the option expires worthless (0 payoff).

Question 15

A European option is more valuable than an otherwise similar American option on the same share.

Accepted Answer

A European option can only be exercised at expiration, while an American option can be exercised at any time before expiration, potentially making the American option more valuable due to its greater flexibility.

Question 16

Use the figure for the question(s)below. 
-This graph depicts the payoffs of

Accepted Answer

The answer of Use the figure for the question(s)below. 
-This...

Question 17

Suppose that a share of Callidus Corp sells at a price of $45 on the expiration date. Compute the payoff to the seller of a put option if the exercise price is $30.

Accepted Answer

Since the market price ($45) is above the exercise price ($30), the put option will not be exercised, resulting in a payoff of $0 to the seller.

Question 18

Suppose you purchase a call option for $5 and an exercise price of $40. On the expiration day, the price of the share is $55. What is the return on the call option if you hold your position until maturity?

Accepted Answer

The return on the call option is calculated as (Selling price - Purchase price) / Purchase price * 100. In this case, the selling price is $55 (the price of the share on the expiration day), and the purchase price is $5. Therefore, the return on the call option is (55 - 5) / 5 * 100 = 200%.

Question 19

Use the figure for the question(s)below. 
-You have shorted a call option on WSJ stock with an exercise price of $50. The option will expire in exactly six months. If the share is trading at $45 in three month, what will you owe for each share in the contract?

Accepted Answer

Since the share is trading at $45, which is below the exercise price of $50, the option will not be exercised, and you will owe nothing.

Question 20

Suppose you purchase a call option for $4 and an exercise price of $30. On the expiration day, the price of the share is $40. What is the return on the call option if you hold your position until maturity?

Accepted Answer

The return on the call option is calculated by taking the profit from the option, subtracting the cost of the option, and then dividing by the cost of the option. Here, the profit is ($40 - $30) = $10 per share. Subtracting the cost of the option ($4), the net profit is $6. The return is ($6 / $4) * 100% = 150%.

Quiz 20: Option Applications and Corporate Finance

Use the figure for the question(s) below. -You pay $4.75 for a call option on Vartan Industries that expires in six months with an exercise price of $45.00. Six months later, at expiration, Vartan Industries is trading at $47.00 per share. Your profit per share on this transaction is closest to: