Question 1

A call option with 6 months to expiration currently sells for $2.20. A put option with the same expiration sells for $0.50. The options are European style. The risk-free rate is 3.0 percent and the strike price of both options is $50. What is the current stock price?
A) $47.89
B) $49.19
C) $50.97
D) $51.29
E) $52.08

Accepted Answer

The answer of A call option with 6 months to...

Question 2

You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.

Accepted Answer

The answer of You wrote a put with a strike...

Question 3

A European call has a strike price of $42.50. The underlying stock's price is $43.40. What is the lower price bound of this call?
A) $0.00
B) $0.30
C) $0.60
D) $0.90
E) $1.00

Accepted Answer

The answer of A European call has a strike price...

Question 4

A 4-month call has a strike price of $20. The current underlying stock price is $21.45. What is the intrinsic value of this call?
A) $0.00
B) $0.48
C) $1.45
D) $3.90
E) $4.35

Accepted Answer

The intrinsic value of a call option is equal to the current stock price minus the strike price. Therefore, the intrinsic value of this call option is $1.45 ($21.45 - $20).

Question 5

A stock is currently selling for $26.50. A 2-month put option with a strike price of $30 has an option premium of $4.15. The risk-free rate is 2.5 percent and the market rate is 9.75 percent. What is the option premium on a 2-month call with a $30 strike price? Assume the options are European style.
A) $0.00
B) $0.33
C) $0.41
D) $0.67
E) $0.77

Accepted Answer

The correct answer is E.The call option premium can be calculated using the Black-Scholes formula:C = S * N(d1) - K * e^(-r * t) * N(d2)where:S = stock price = $26.50K = strike price = $30r = risk-free rate = 2.5%t = time to expiration = 2 months = 1/6 yearsigma = volatility = 9.75%d1 = (ln(S/K) + (r + sigma^2/2) * t) / (sigma * sqrt(t))d2 = d1 - sigma * sqrt(t)N(d1) = 0.6700N(d2) = 0.5000C = $26.50 * 0.6700 - $30 * e^(-0.025 * 1/6) * 0.5000C = $17.75 - $17.34C = $0.41Therefore, the option premium on a 2-month call with a $30 strike price is $0.41.

Question 6

A 6-month put has a strike price of $32.50. The underlying stock's price is $31.10. What is intrinsic value of this put?
A) $0.00
B) $0.70
C) $1.40
D) $2.10
E) $2.80

Accepted Answer

Intrinsic value = $32.50 - $31.10 = $1.40

Question 7

A 6-month call has a strike price of $30. The underlying stock is priced at $32.80 and the option premium on the call is $3.40. What is the per share time value of the call?
A) $0.00
B) $0.60
C) $1.40
D) $2.80
E) $3.60

Accepted Answer

The intrinsic value of the call is $2.80 (the current stock price of $32.80 minus the strike price of $30). Therefore, the time value is $0.60 ($3.40 premium - $2.80 intrinsic value).

Question 8

You own 100 shares of Deltona stock which is currently worth $43 a share. You just paid an option premium of $0.85 to buy one put contract on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract?
A) $40.00
B) $40.85
C) $42.15
D) $43.00
E) $43.85

Accepted Answer

Maximum loss = Strike price = $40 a share

Question 9

A 3-month put has a strike price of $47.50 and an option premium of $1.40. The underlying stock is selling for $46.70 per share. What is the time value of the put?
A) $0.00
B) $0.60
C) $0.70
D) $1.20
E) $1.40

Accepted Answer

Time value = $1.40 - ($47.50 - $46.70) = $0.60

Question 10

A call option has a premium of $3.10, a strike price of $55, and 2 months to expiration. The current stock price is $52.20. The stock will pay a $1.25 dividend in one month. The risk-free rate is 2.5 percent. What is the premium on a 2-month put with a strike price of $55? Assume the options are European style.
A) $2.08
B) $2.15
C) $3.32
D) $4.12
E) $6.92

Accepted Answer

The answer of A call option has a premium of...

Question 11

You purchased a put with a strike price of $35 and an option premium of $0.45. You simultaneously bought the stock at a price of $34 a share. What is your profit per share on these transactions if the stock price at expiration is $33.50?
A) -$1.15
B) -$0.15
C) $0.15
D) $0.35
E) $0.55

Accepted Answer

The answer of You purchased a put with a strike...

Question 12

A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call?
A) $0.00
B) $0.30
C) $0.70
D) $1.00
E) $1.30

Accepted Answer

Lower call price bound = $0, because the call is out-of-the money

Question 13

A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price?
A) $0.00
B) $0.09
C) $0.34
D) $1.48
E) $1.61

Accepted Answer

Using the put-call parity for European options: P = C + PV(K) - S, where P is the put price, C is the call price ($1.40), PV(K) is the present value of the strike price ($25 discounted at the risk-free rate of 2.5% for 6 months), and S is the stock price ($25.75). Calculating gives P = $1.40 + ($25 / (1 + 0.025/2)) - $25.75 = $0.34.

Question 14

A call option with 1 month to expiration currently sells for $0.70. A put option with the same expiration sells for $1.10. The options are European style. The risk-free rate is 3 percent and the strike price of both options is $18.00. What is the current stock price?
A) $16.87
B) $17.06
C) $17.29
D) $17.56
E) $17.86

Accepted Answer

We can use the put-call parity formula to solve for the stock price:

Stock price + Present value of strike price = Call price + Put price
S + e^(-rT)K = C + P

Plugging in the given values:

S + e^(-0.03*1/12)*18 = 0.7 + 1.1
S + 17.9645 = 1.8
S = 17.56

Therefore, the current stock price is $17.56, which is option D.

Question 15

A 4-month, $25 call option on Teller stock has an option premium of $0.25. The 4-month, $25 put option has an option premium of $0.80. The risk-free rate is 3 percent. The options are European -style. What is the price of Teller stock?
A) $24.20
B) $24.53
C) $24.62
D) $25.97
E) $26.08

Accepted Answer

Stock price = $0.25 - $0.80 + $25 / (1 + 0.03)^{4 / 12} = $24.20

Question 16

A stock is currently selling for $40.85. A 3-month call option with a strike price of $40 has an option premium of $1.30. The risk-free rate is 2 percent and the market rate is 9.5 percent. What is the option premium on a 3-month put with a $40 strike price? Assume the options are European style.
A) $0.00
B) $0.05
C) $0.15
D) $0.25
E) $0.35

Accepted Answer

Put option price = $1.30 - $40.85 + $40/(1 + .02)^3/12 = $0.25

Question 17

SLK stock is selling for $28 a share. A $30 call on this stock is priced at $2. What is your maximum profit and maximum loss if you buy the stock and write the call?
 How does this compare to your maximum profit and loss if you write the call but do not purchase the stock?

Accepted Answer

The answer of SLK stock is selling for $28 a...

Question 18

A 6-month put has a strike price of $42.50. The underlying stock's price is $40.20. What is the intrinsic value of this put?
A) $0.00
B) $0.90
C) $1.80
D) $2.30
E) $3.60

Accepted Answer

The intrinsic value of a put option is calculated as the strike price minus the current stock price. Here, it is $42.50 - $40.20 = $2.30.

Question 19

A call option has a premium of $0.60, a strike price of $40, and 3 months to expiration. The current stock price is $39.60. The stock will pay a $0.80 dividend two months from now. The risk-free rate is 3 percent. What is the premium on a 3-month put with a strike price of $40? Assume the options are European style.
A) $0.25
B) $0.51
C) $0.78
D) $1.23
E) $1.50

Accepted Answer

Put option price = $0.60 - $39.60 + 0.80 / (1.03)^{2 / 12} + $40 / (1 + 0.03)^{1 / 4} = $1.50

Question 20

Explain how options can be used to manage risk. Provide an example using a call option and another example using a put option.

Accepted Answer

The answer of Explain how options can be used to...

Quiz 15: Stock Options

A call option with 6 months to expiration currently sells for $2.20. A put option with the same expiration sells for $0.50. The options are European style. The risk-free rate is 3.0 percent and the strike price of both options is $50. What is the current stock price?

You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.

A European call has a strike price of $42.50. The underlying stock's price is $43.40. What is the lower price bound of this call?

A 4-month call has a strike price of $20. The current underlying stock price is $21.45. What is the intrinsic value of this call?

A 6-month put has a strike price of $32.50. The underlying stock's price is $31.10. What is intrinsic value of this put?

A 6-month call has a strike price of $30. The underlying stock is priced at $32.80 and the option premium on the call is $3.40. What is the per share time value of the call?

You own 100 shares of Deltona stock which is currently worth $43 a share. You just paid an option premium of $0.85 to buy one put contract on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract?

A 3-month put has a strike price of $47.50 and an option premium of $1.40. The underlying stock is selling for $46.70 per share. What is the time value of the put?

You purchased a put with a strike price of $35 and an option premium of $0.45. You simultaneously bought the stock at a price of $34 a share. What is your profit per share on these transactions if the stock price at expiration is $33.50?

A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call?

A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price?

A call option with 1 month to expiration currently sells for $0.70. A put option with the same expiration sells for $1.10. The options are European style. The risk-free rate is 3 percent and the strike price of both options is $18.00. What is the current stock price?

A 4-month, $25 call option on Teller stock has an option premium of $0.25. The 4-month, $25 put option has an option premium of $0.80. The risk-free rate is 3 percent. The options are European -style. What is the price of Teller stock?

A stock is currently selling for $40.85. A 3-month call option with a strike price of $40 has an option premium of $1.30. The risk-free rate is 2 percent and the market rate is 9.5 percent. What is the option premium on a 3-month put with a $40 strike price? Assume the options are European style.

SLK stock is selling for $28 a share. A $30 call on this stock is priced at $2. What is your maximum profit and maximum loss if you buy the stock and write the call? How does this compare to your maximum profit and loss if you write the call but do not purchase the stock?

A 6-month put has a strike price of $42.50. The underlying stock's price is $40.20. What is the intrinsic value of this put?

Explain how options can be used to manage risk. Provide an example using a call option and another example using a put option.