Question 1

The price of a stock is $40. There are both call and put options on this stock. Both options have an exercise price of $40 and expire in two months. The market return is 10% and the risk-free rate is 4%. Given this, you know the
A) Call option must be worthless
B) Put option must be worthless
C) Call option price is greater than the put option price
D) Put option price is greater than the call option price
E) Both (A) and (B)

Accepted Answer

The price of the call option is generally higher than the put option for at-the-money options (where the exercise price is equal to the stock price) due to the cost of carry. The cost of carry makes holding the underlying asset more expensive due to factors like the risk-free rate, which in this case is 4%. Since the holder of the call option benefits from the stock's potential appreciation without having to own the stock, while the put option holder benefits from potential depreciation, the call option's price incorporates the cost of carry, making it more expensive than the put option in a positive interest rate environment.

Question 2

Suppose you feel a certain stock will appreciate in value. Which of the following option strategies will create a profit for you?
I. Buy a call.
II. Buy a put.
III. Sell a call.
IV. Sell a put.
A) II and III only.
B) I only.
C) II and IV only.
D) I and IV only.
E) IV only.

Accepted Answer

Buying a call option (I) will allow you to profit if the stock price goes up, while selling a put option (IV) will allow you to profit if the stock price stays the same or goes up. Buying a put option (II) will only allow you to profit if the stock price goes down, and selling a call option (III) will only allow you to profit if the stock price stays the same or goes down. Therefore, the correct option strategies to create a profit would be buying a call (I) and selling a put (IV), so answer D is correct.

Question 3

Which one of the following options is in-the-money?
A) call with a $45 strike and an underlying stock price of $42
B) put with a $35 strike and an underlying stock price of $36
C) call with a $15 strike and an underlying stock price of $15
D) put with a $45 strike and an underlying stock price of $42
E) call with a $30 strike and an underlying stock price of $29

Accepted Answer

An option is considered in-the-money when it has intrinsic value. For a put option, this occurs when the strike price is above the underlying stock price. Therefore, option D, a put with a $45 strike and an underlying stock price of $42, is in-the-money because the holder can sell the stock at the higher strike price.

Question 4

Ignoring the premium, the maximum loss from writing a call option is:
A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Accepted Answer

When a call option is written, the seller has the obligation to sell the underlying asset to the buyer of the option at the strike price, if the buyer chooses to exercise the option. As the price of the underlying asset rises, the seller's losses increase since they are obligated to sell at the lower strike price. There is no limit to how high the stock price can go, which means that the seller's losses can be unlimited. Therefore, the maximum loss from writing a call option is unlimited.

Question 5

You have written a put option on ABC stock. The exercise price is $30 and the current stock price is $31.The option payoff wills _________ if the stock price increases by $1 and the payoff will _________ if the stock price decreases by $1.
A) Increase; decrease
B) Decrease; increase
C) Remain the same; increase
D) Remain the same; decrease
E) Remain the same; remain the same

Accepted Answer

The payoff of a put option is determined by the difference between the exercise price and the stock price, only if the stock price is below the exercise price. Since the current stock price is above the exercise price, changes in the stock price do not affect the payoff.

Question 6

The maximum loss from buying a call option is:
A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Accepted Answer

The maximum loss from buying a call option is limited to the option price, which is the premium paid to purchase the option.

Question 7

Which one of the following stock options is in-the-money?
A) Call with a $35 exercise price and a stock price of $33
B) Put with a $40 exercise price and a stock price of $41
C) Call with a $25 exercise price and a stock price of $25
D) Put with a $30 exercise price and a stock price $29
E) Call with a $20 exercise price and a stock price of $18

Accepted Answer

A put option is in-the-money when its exercise price is higher than the stock price. In this case, the exercise price is $30 and the stock price is $29, making it in-the-money.

Question 8

The lower price for a call option on a stock is the _________ and the lower price limit for a put option on the same stock is the _________
A) Stock price; stock price.
B) Stock price; put intrinsic value.
C) Call intrinsic value; stock price.
D) Call intrinsic value; put exercise price.
E) Call intrinsic value; put intrinsic value.

Accepted Answer

The lower price for a call option on a stock is the call intrinsic value, which represents the amount by which the stock price exceeds the exercise price (strike price) of the call option. On the other hand, the lower price limit for a put option on the same stock is the put intrinsic value, which represents the amount by which the exercise price of the put option exceeds the stock price. Therefore, the correct answer is E - call intrinsic value for the lower price of a call option and put intrinsic value for the lower price limit of a put option.

Question 9

Ignoring the premium, the maximum loss from writing a put option is:
A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Accepted Answer

The answer of Ignoring the premium, the maximum loss from...

Question 10

Suppose you feel a certain stock will decline in value. Which of the following option strategies will create a profit for you?
I. Buy a call.
II. Buy a put.
III. Sell a call.
IV. Sell a put.
A) II only.
B) I and IV only.
C) III only.
D) I and II only.
E) II and III only.

Accepted Answer

Buying a put option gives you the right to sell the underlying stock at a predetermined price, which can be profitable if the stock's value declines. Selling a call option obligates you to sell the stock at a set price if the option is exercised, which can also be profitable if the stock's value declines, as the option may expire worthless or be bought back at a lower premium.

Question 11

A stock is currently selling for $65. There exists both a call option and a put option with a strike price of $65 and the same expiration date. Which of the following is true?
A) The call price is always greater than the put price.
B) The put price is always greater than the call price.
C) The call and the put will have the same price.
D) The call price will be greater than the put price only if the stock pays a dividend.
E) None of the above.

Accepted Answer

The answer of A stock is currently selling for $65....

Question 12

The maximum price for a put option is:
A) the stock price.
B) the strike price.
C) the intrinsic value.
D) the stock price minus the strike price.
E) There is no upper limit for a put price.

Accepted Answer

The maximum price for a put option is the strike price. This is because a put option gives the holder the right to sell the underlying asset at the strike price. In the most extreme case, if the stock price goes to zero, the put option's value cannot exceed the strike price, as this would be the total value the option holder could gain by exercising the option.

Question 13

The maximum price for a call option is:
A) the stock price.
B) the strike price.
C) the intrinsic value.
D) the stock price minus the strike price.
E) There is no upper limit for a call price.

Accepted Answer

The maximum price for a call option is the stock price, as buying a call option gives the right but not the obligation to buy the underlying asset at the strike price. Paying more than the current stock price for the option would not be rational, as you could just buy the stock directly in the market for less.

Question 14

The maximum loss from buying a put option is:
A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Accepted Answer

The maximum loss from buying a put option is limited to the option price, which is the premium paid to purchase the option. This is because the buyer of the option is not obligated to exercise it; if it is not beneficial to do so, the option will simply expire worthless, resulting in a loss equal to the initial premium paid.

Question 15

According to put-call parity, a put option can be replicated by:
A) buying a call, selling the underlying stock, and lending at the risk-free rate.
B) selling a call, selling the underlying stock, and lending at the risk-free rate.
C) buying a call, buying the underlying stock, and borrowing at the risk-free rate.
D) selling a call, buying the underlying stock, and borrowing at the risk-free rate.
E) buying a call, selling the underlying stock, and borrowing at the risk-free rate.

Accepted Answer

Put-call parity is a principle that defines the relationship between the price of European put options and European call options of the same class, that is, with the same underlying asset, strike price, and expiration date. According to put-call parity, a put option can be replicated by buying a call option, selling the underlying stock, and lending an amount at the risk-free rate. This combination creates a position that should have the same payoff as owning a put option.

Question 16

Which one of the following stock options is out-of-the-money?
A) Call with a $35 exercise price and a stock price of $36
B) Put with a $40 exercise price and a stock price of $38
C) Call with a $25 exercise price and a stock price of $25
D) Put with a $30 exercise price and a stock price $29
E) Call with a $20 exercise price and a stock price of $19

Accepted Answer

An out-of-the-money option is one that would not make money if it were exercised at the current time. For a call option, this means the stock price is below the exercise price. Option E is a call option with a stock price ($19) below the exercise price ($20), making it out-of-the-money.

Question 17

The most critical assumption of put-call parity is that
A) both options may have different exercise prices, but the same expiration dates
B) both options have the same exercise prices and the same expiration dates
C) both options will produce the same profit on the stock as well as a risky bond
D) both options will produce the same profit on the stock as well as a risk-free bond
E) both options will produce the same profit on the stock as well as another risky asset

Accepted Answer

Put-call parity is based on the relationship between the price of European put and call options with the same strike price and expiration date. This relationship ensures that the positions are equivalent given the same exercise conditions.

Question 18

You own a call option on ABC stock. The exercise price is $25 and the current stock price is $23. The option payoff will _________ if the stock price increases by $5 and the payoff will _________ if the stock price decreases by $5.
A) Increase; decrease
B) Increase; remain the same
C) Remain the same; increase
D) Remain the same; decrease
E) Decrease; remain the same

Accepted Answer

A call option payoff increases when the stock price exceeds the exercise price. If the stock price increases by $5, it becomes $28, which is above the exercise price of $25, resulting in a positive payoff. If the stock price decreases by $5, it becomes $18, which is still below the exercise price, so the payoff remains the same at zero.

Question 19

According to put-call parity, a call option can be replicated by:
A) selling a put, buying the underlying stock, and borrowing at the risk-free rate.
B) buying a put, selling the underlying stock, and lending at the risk-free rate.
C) buying a put, buying the underlying stock, and lending at the risk-free rate.
D) buying a put, buying the underlying stock, and borrowing at the risk-free rate.
E) selling a put, selling the underlying stock, and lending at the risk-free rate.

Accepted Answer

According to put-call parity, the following relationship must hold between a call option and a put option with the same strike price and expiration date:
Call price - Put price = Stock price - Present value of the strike price.
To replicate a call option, we can buy a put option with the same strike price and expiration date and then buy the underlying stock and borrow at the risk-free rate. This will give us the same cash flows as the call option. Therefore, the correct answer is option D: buying a put, buying the underlying stock, and borrowing at the risk-free rate.

Question 20

Which of the following combinations will create an in-the-money option? I. Call: exercise price > current stock price II. Call: exercise price < current stock price III. Put: exercise price > current stock price IV. Put: exercise price < current stock price A) I B) III C) II and IV D) I and IV E) II and III

Accepted Answer

An in-the-money call option has an exercise price below the current stock price (II), allowing the holder to buy the stock below market value. An in-the-money put option has an exercise price above the current stock price (III), allowing the holder to sell the stock above market value.

Quiz 14: Options

The price of a stock is $40. There are both call and put options on this stock. Both options have an exercise price of $40 and expire in two months. The market return is 10% and the risk-free rate is 4%. Given this, you know the

Suppose you feel a certain stock will appreciate in value. Which of the following option strategies will create a profit for you? I. Buy a call. II. Buy a put. III. Sell a call. IV. Sell a put.

Which one of the following options is in-the-money?

Ignoring the premium, the maximum loss from writing a call option is:

You have written a put option on ABC stock. The exercise price is $30 and the current stock price is $31.The option payoff wills _ if the stock price increases by $1 and the payoff will _ if the stock price decreases by $1.

The maximum loss from buying a call option is:

Which one of the following stock options is in-the-money?

The lower price for a call option on a stock is the _ and the lower price limit for a put option on the same stock is the _

Ignoring the premium, the maximum loss from writing a put option is:

Suppose you feel a certain stock will decline in value. Which of the following option strategies will create a profit for you? I. Buy a call. II. Buy a put. III. Sell a call. IV. Sell a put.

A stock is currently selling for $65. There exists both a call option and a put option with a strike price of $65 and the same expiration date. Which of the following is true?

The maximum price for a put option is:

The maximum price for a call option is:

The maximum loss from buying a put option is:

According to put-call parity, a put option can be replicated by:

Which one of the following stock options is out-of-the-money?

The most critical assumption of put-call parity is that

You own a call option on ABC stock. The exercise price is $25 and the current stock price is $23. The option payoff will _ if the stock price increases by $5 and the payoff will _ if the stock price decreases by $5.

According to put-call parity, a call option can be replicated by:

Which of the following combinations will create an in-the-money option? I. Call: exercise price > current stock price II. Call: exercise price < current stock price III. Put: exercise price > current stock price IV. Put: exercise price < current stock price