Deck 3: Insurance, collars, and Other Strategies

Question 1

The owner of a house worth $180,000 purchases an insurance policy at the beginning of the year for a price of $1,000.The deductible on the policy is $5,000.If after 6 months the homeowner experiences a casualty loss valued at $45,000,what is the homeowner's net gain/loss? Assume an opportunity cost of capital of 4.0% annually.

A) $0
B) $1,000
C) $5,000
D) $6,020

Answer 1

D

Question 2

What is the maximum profit that an investor can obtain from a strategy employing a long 830 call and a short 850 call over 6 months? Interest rates are 0.5% per month.

A) $6.80
B) $7.68
C) $9.24
D) $12.32

Answer 2

B

Question 3

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,what is the profit or loss at expiration (in 6 months)if the market index is $810?

A) $20.00 gain
B) $18.65 gain
C) $36.29 loss
D) $43.76 loss

Answer 3

D

Question 4

What is the maximum loss that an investor can obtain over 6 months from a strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.

A) $6.80
B) $7.68
C) $9.24
D) $12.32

Question 5

An investor purchases a call option with an exercise price of $55 for $2.60.The same investor sells a call on the same security with an exercise price of $60 for $1.40.At expiration,3 months later,the stock price is $56.75.All other things being equal and given an annual interest rate of 4.0%,what is the net profit or loss to the investor?

A) $1.21 loss
B) $1.50 loss
C) $0.54 gain
D) $1.65 gain

Question 6

A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830.The put premium is $18.00 and the call premium is $44.00.Interest rates are 0.5% per month.What is the breakeven price of the market index for this strategy at expiration (in 6 months)?

A) $802.12
B) $830.00
C) $855.21
D) $866.32

Question 7

What is the breakeven point that an investor can obtain from a 6-month strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.

A) $832.82
B) $842.32
C) $852.22
D) $862.92

Question 8

What is the difference between naked and covered call writing?

Question 9

What are the similarities and differences between bear and bull spreads?

Question 10

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,what is the estimated price of a call option with an exercise price of $830?

A) $42.47
B) $45.26
C) $47.67
D) $49.55

Question 11

Compare the butterfly spread,bear spread,bull spread,covered call,straddle,and other strategies.Is any one strategy better than another? Are there trade-offs between each that is almost perfect or do significant advantages exist from one strategy to another?

Question 12

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,compute the profit or loss from the long put position by itself (in 6 months)if the market index is $810.

A) $3.45 gain
B) $1.45 gain
C) $2.80 loss
D) $1.36 loss

Question 13

A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830.The put premium is $18.00 and the call premium is $44.00.Interest rates are 0.5% per month.Determine the net profit or loss if the index price at expiration is $830 (in 6 months).

A) $0
B) $23.67 loss
C) $26.79 gain
D) $28.50 gain

Question 14

The $850 strike put premium is $25.45 and the $850 strike call is selling for $30.51.Calculate the breakeven index price for a strategy employing a short call and long put that expires in 6 months.Interest rates are 0.5% per month.

A) $822.67
B) $824.79
C) $830.76
D) $875.82

Question 15

Using option strategy concepts,what is the value of an insured home,if the value of the uninsured home is $220,000,the house was purchased for $180,000 and the house has a casualty policy costing $500 with a $2,000 deductible? Ignore interest costs.

A) $180,000
B) $217,500
C) $220,000
D) $222,500

Question 16

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,compute the profit or loss from the long index position by itself expiration (in 6 months)if the market index is $810.

A) $45.21 loss
B) $21.22 loss
C) $18.00 gain
D) $24.25 gain

Question 17

At the 6-month point,what is the breakeven index price for a strategy of longing the market index at a price of 830? Interest rates are 0.5% per month.

A) $802.12
B) $830.00
C) $855.21
D) $866.32

Question 18

Why is a straddle position considered a speculation on the asset's volatility?

Question 19

Why might the manager of a portfolio employ a protective put strategy?

Question 20

Explain how a long stock and long put strategy equals the cash flow from a long call strategy.