Deck 22: Benching the Equity Players

Question 1

Delta enables the portfolio manager to determine the

A) number of options necessary to mimic the returns of the underlying security
B) number of options necessary to reduce the risk of the underlying portfolio by half
C) number of options necessary to double the portfolio return per unit of risk
D) standard deviation of portfolio returns

Answer 1

number of options necessary to mimic the returns of the underlying security

Question 2

The simultaneous holding of a long stock position and a long put is called a

A) fiduciary put
B) protective put
C) collateralized put
D) cash-secured put

Answer 2

protective put

Question 3

For a call option, delta is always

A) greater than one
B) less than one
C) less than one and greater than zero
D) less than or equal to zero

Answer 3

less than one and greater than zero

Question 4

For a call option, delta _____ as the striking price _____.

A) increases, increases
B) decreases, increases
C) increases, approaches the stock price
D) decreases, approaches the stock price

Question 5

For at-the-money puts and calls on the same stock

A) the put delta is always less than the call delta
B) the put delta is always equal to the call delta
C) the put delta is always greater than the call delta
D) the put delta is always less than or equal to the call delta

Question 6

When calculating a protective put hedge ratio, all of the following pieces of information are necessary except

A) delta
B) option striking price
C) stock beta
D) number of shares of stock held

Question 7

A characteristic of stock index futures is, they

A) have limited risk
B) pay dividends monthly
C) are settled in cash
D) have a beta of zero

Question 8

If the S&P500 index is 400.00, how many S&P500 futures contracts must you sell to hedge a $10 million stock portfolio with a beta of 1.10?

A) 100
B) 110
C) 120
D) 130

Question 9

Which of the following statements is true regarding a stock index futures contract?

A) The basis is usually negative
B) The basis will converge on zero as time passes
C) The basis will only decrease; it cannot increase
D) The basis will only increase; it cannot decrease

Question 10

Dynamic hedging strategies seek to

A) replicate a put option
B) replicate a call option
C) replicate a covered call option
D) replicate a short put

Question 11

A portfolio contains 10,000 shares of XYZ stock; the portfolio manager writes 10 XYZ calls. If the call delta is 0.455, what is the position delta?

A) 455
B) 545
C) 9,545
D) 10,455

Question 12

A portfolio contains 10,000 shares of XYZ stock; the portfolio manager buys 100 XYZ puts. If the put delta is -0.220, what is the position delta?

A) 220
B) 7,800
C) 10,220
D) Cannot be determined

Question 13

An ABC JUN 45 call has a delta of 0.445; what is the delta of an ABC JUN 45 put?

A) 0.445
B) 0.555
C) -0.555
D) -0.445

Question 14

All of the following will lower position delta except

A) buying puts
B) buying calls
C) writing calls
D) selling stock

Question 15

When futures contracts are used in dynamic hedging, falling security prices will cause the manager to

A) buy futures contracts
B) buy more stock
C) sell futures contracts
D) sell stock

Question 16

Assume the stock price is $50, a call option has a premium of $5, a put option on that stock has a premium of $3, and you presently hold no position in the three. Ignoring commissions, a protective put would require an investment of

A) $47 per share
B) $53 per share
C) $55 per share
D) $58 per share

Question 17

Suppose you hold a protective put position when the stock price is $52 and the put option has a strike price of $50. If the put option has a delta of -0.500 and the stock price falls to $44 at the expiration date, what would be the change in value of your protective put position from today to the expiration date?

A) -$8 per share
B) -$4 per share
C) -$2 per share
D) 0

Question 18

Suppose the stock price is $48, a call option has a strike price of $50 and a premium of $5, and a put option has a strike price of $45 and a premium of $2. Assume you currently hold no position. If you create a protective put position, what is the maximum possible loss and maximum possible gain per share at the expiration date?

A) Maximum Loss = $1, Maximum Gain = Unlimited
B) Maximum Loss = $5, Maximum Gain = Unlimited
C) Maximum Loss = $47, Maximum Gain = $1
D) Maximum Loss = $50, Maximum Gain = $5

Question 19

Suppose the stock price is $48, a call option has a strike price of $50 and a premium of $5, and a put option has a strike price of $45 and a premium of $2. Assume you currently hold no position. If you create a covered call position, what is the maximum possible loss and maximum possible gain per share at the expiration date?

A) Maximum Loss = $1, Maximum Gain = Unlimited
B) Maximum Loss = $5, Maximum Gain = Unlimited
C) Maximum Loss = $43, Maximum Gain = $7
D) Maximum Loss = $53, Maximum Gain = $3

Question 20

Suppose the stock price is $50, the call delta is 0.600 and the put delta is -0.400. A portfolio of 1,000 shares, writing calls on 500 shares, and buying puts on 500 shares has a position delta of

A) 500
B) 1500
C) 4500
D) 5500

Question 21

Suppose the stock price is $50, the call delta is 0.600 and the put delta is -0.400. A portfolio of 1,000 shares, writing calls on 700 shares, and buying puts on 300 shares has a position delta of

A) 460
B) 700
C) 1200
D) 1300

Question 22

Suppose the S&P 100 index closed at 541.86 and that a May 500 put has a premium of $2.50 and a delta of -0.444. You have a $1 million stock portfolio with a beta of 1.20. How many index put options contracts must you buy to fully hedge this portfolio?

A) 22
B) 50
C) 125
D) 5000

Question 23

Suppose the June S&P 500 index futures contract settled at 1091.80. You have a $2.730 million stock portfolio with a beta of 1.20. How many index futures contracts must you enter into in order to have a 100% hedge?

A) Short 10 contracts
B) Short 12 contracts
C) Long 10 contracts
D) Long 12 contracts