Question 1

Stock options have been traded on exchanges since:

Accepted Answer

Stock options began trading on options exchanges in the early part of the 1970s.

Question 2

On March 30 you are holding a call option on a stock (exercise price of $60),which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

Accepted Answer

The call option is out of the money since the stock price is below the exercise price, so its value is very little, close to zero, but not exactly zero due to the possibility of the stock price rising above $60 before expiration.

Question 3

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Accepted Answer

Intrinsic value = $75 - 60 = $15; Thus the premium must exceed $15 since there is time remaining prior to expiration.

Question 4

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60,what is the value of the callable bond?

Accepted Answer

The value of the callable bond is the value of the straight bond minus the value of the call option. The value of the straight bond is $1,000. The value of the call option is $60. Therefore, the value of the callable bond is $1,000 - $60 = $940.

Question 5

Under what circumstance will the buyer of a put option be asked to perform her obligation?

Accepted Answer

The buyer of a put option has the right, but not the obligation, to sell the underlying asset at the strike price. Therefore, they cannot be asked to perform any obligation.

Question 6

The payoffs from investing in options are designed so that:

Accepted Answer

The payoffs from investing in options are designed so that when one party gains, the other party loses. This is because options contracts give buyers the right, but not the obligation, to buy or sell an underlying asset at a set price within a certain time frame. Sellers, on the other hand, are obligated to buy or sell the asset if the buyer chooses to exercise the option. Therefore, the seller's gain is the buyer's loss, and vice versa.

Question 7

A writer of a call option expects the stock price to:

Accepted Answer

A writer (seller) of a call option expects the stock price to decrease or remain below the strike price until the option expires, so that the option will expire worthless and they can keep the premium received from selling the option.

Question 8

Option buyers can have a(n)_____ of exercising their options.Options sellers can have a(n)_____ of exercising their options.

Accepted Answer

Option buyers have the right to exercise their options, while option sellers have the obligation to fulfill the contract if the buyer chooses to exercise.

Question 9

What is the minimum value of the call option on a convertible bond (with face value of $1,000)with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity,and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

Accepted Answer

Bond value = $1,000 because coupon rate = market rateConversion value = 30 × $35 = $1,050Value of call = $1,050 - 1,000 = $50

Question 10

Three months ago you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92,what is your return on investment?

Accepted Answer

Since the exercise price is $100, and the stock price at the expiration is $92, the option can be exercised to sell the stock at the higher price of $100, resulting in a profit of $8 per share. The option costs $4, so the return on investment is ($8 profit - $4 option cost) / $4 option cost = 100%.

Question 11

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit or loss per share if the option is exercised tomorrow?

Accepted Answer

If the option is exercised tomorrow, Joe will have to buy the stock at the exercise price of $40, even though it is currently trading at $28. This means he will have a loss of $12 per share. However, he received a premium of $4 per share when he sold the option, so his net loss per share is $12 - $4 = $8. Therefore, the correct answer is option B.

Question 12

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit or loss per share at tomorrow's expiration?

Accepted Answer

Since the stock price is below the exercise price, the option will expire worthless. Jennifer keeps the premium of $3 per share as her profit.

Question 13

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

Accepted Answer

Profit % = ($85 - 81 - 10)/$10 = -60%

Question 14

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

Accepted Answer

The buyer of a call option with an exercise price of $65 has the right to buy the stock at $65, which is cheaper than the current market price of $85. Therefore, there is a chance that the buyer would exercise the option to buy the stock at $65 and sell it in the market for a profit of $20. The other options are less likely to be exercised as they are either at the current market price (Option C) or above it (Option B and D).

Question 15

You are currently holding a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option will be:

Accepted Answer

If the current stock price is $60 and the exercise price is $80, it means that exercising the option will result in a loss because you would have to pay $80 for a stock that is only worth $60. Therefore, the net proceeds would be negative $20. It would be more beneficial to either hold onto the option and hope the stock price increases, or sell the option to someone else for a profit.

Question 16

It is May 19 and you own a June,European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

Accepted Answer

It is not advisable to exercise the option now as it is trading below its intrinsic value (current stock price minus exercise price). Buying more options would increase risk without any clear indication of higher returns. Selling the ABC stock now would not be wise if the price is expected to rise further. Therefore, the best option is to wait until the June expiration to see if the ABC stock price increases further, which may result in a higher option premium or enable to sell the option at a profit.

Question 17

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

Accepted Answer

The answer of A share of stock is currently priced...

Question 18

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Accepted Answer

The owner of the put option will continue to gain value as the stock price of CBA falls. Therefore, further decreases in CBA stock price will be translated directly into additional option value. However, the owner will not profit $13 per share by exercising now as the strike price is $80 and the current stock price of CBA is $67, which means exercising now would result in a loss. Also, $20 is not the maximum value for this option, as it could increase in value further before its September expiration.

Question 19

Which of the following is correct for the owner of a June call,valued at $3,on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Accepted Answer

The owner of the June call option has the right to buy the shares of XYZ Corp. at the strike price of $60. However, since the current market price of XYZ Corp. is only $55, it is not profitable to exercise the option at the moment. Therefore, the option may expire without any value. So, option D is correct. Options A and C are incorrect because there is no information about the future movement of XYZ Corp. stock prices, and the current profit of the option owner is only theoretical until the option is actually sold or exercised. Option B is also incorrect.

Question 20

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

Accepted Answer

The option with the later expiration date (December) will generally have a higher price due to the increased time value. Additionally, the put option with the higher exercise price ($75) will also have a higher price since it gives the holder the right to sell the stock at a higher price, providing more downside protection.

Quiz 23: Options

Stock options have been traded on exchanges since:

On March 30 you are holding a call option on a stock (exercise price of $60) ,which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60,what is the value of the callable bond?

Under what circumstance will the buyer of a put option be asked to perform her obligation?

The payoffs from investing in options are designed so that:

A writer of a call option expects the stock price to:

Option buyers can have a(n) _ of exercising their options.Options sellers can have a(n) _ of exercising their options.

What is the minimum value of the call option on a convertible bond (with face value of $1,000) with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity,and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

Three months ago you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92,what is your return on investment?

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit or loss per share if the option is exercised tomorrow?

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit or loss per share at tomorrow's expiration?

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

You are currently holding a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option will be:

It is May 19 and you own a June,European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Which of the following is correct for the owner of a June call,valued at $3,on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

Quiz 23: Options

Stock options have been traded on exchanges since:

On March 30 you are holding a call option on a stock (exercise price of $60) ,which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60,what is the value of the callable bond?

Under what circumstance will the buyer of a put option be asked to perform her obligation?

The payoffs from investing in options are designed so that:

A writer of a call option expects the stock price to:

Option buyers can have a(n) _____ of exercising their options.Options sellers can have a(n) _____ of exercising their options.

What is the minimum value of the call option on a convertible bond (with face value of $1,000) with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity,and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

Three months ago you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92,what is your return on investment?

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit or loss per share if the option is exercised tomorrow?

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit or loss per share at tomorrow's expiration?

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

You are currently holding a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option will be:

It is May 19 and you own a June,European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Which of the following is correct for the owner of a June call,valued at $3,on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

Option buyers can have a(n) _ of exercising their options.Options sellers can have a(n) _ of exercising their options.