Question 1

Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $48,what is your net profit (or loss)? Ignore transaction costs.

Accepted Answer

profit from options = 4(10)= 40
net profit = 40 - 10(2.75)= $12.50

Question 2

A put option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know a call on the same stock has a value of $2.75,that the price of the put is $1.26 and the stock is currently selling at $47,what is the implied risk free rate?

Accepted Answer

47 + 1.26 = B + 2.75
B = 45.51
50/1+r = 48.51
r = .0987

Question 3

The price at which the owner of an option can buy or sell the underlying asset is called the

Accepted Answer

The price at which the owner of an option can buy or sell the underlying asset is called the strike price. The market price refers to the current price of the asset, the liquidation value is the value of an asset that is being sold in a liquidation scenario, and the intrinsic value refers to the actual value of the asset. Therefore, the correct answer is C, strike price.

Question 4

The option that gives the owner the right to buy an asset at a fixed price at or before a certain date is called a

Accepted Answer

A call option gives the owner the right to buy an asset at a fixed price at or before a certain date. Put option, on the other hand, gives the owner the right to sell an asset at a fixed price at or before a certain date. Parity option and swaption are different types of options with different characteristics.

Question 5

A put option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 4%,that the stock currently sells at $47 and the call on the same stock has a value of $2.75,what is the price of the put?

Accepted Answer

B = 50/1.04 = 48.08
47 + P = 48.08 + 2.75
P = 3.83

Question 6

Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $56,what is your net profit (or loss)? Ignore transaction costs.

Accepted Answer

net profit = 0 - 10(2.75)= -27.50

Question 7

Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $56,what is your net profit (or loss)? Ignore transaction costs.

Accepted Answer

net profit = 10(4)- 10(2.75)= 12.50

Question 8

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $20 and currently sells at $4.50.What is the intrinsic value of the option?

Accepted Answer

intrinsic value = 20 - 17.50 = 2.50

Question 9

A call option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 4%,that the stock currently sells at $47 and the put on the same stock has a value of $2.75,what is the price of the call?

Accepted Answer

B = 50/1.04 = 48.08
47 + 2.75 = 48.08 + C
C = $1.67

Question 10

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $20 and currently sells at $4.50.What is the time value of the option?

Accepted Answer

intrinsic value = 0
time value = 4.50 - 0 = 4.50

Question 11

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $15 and currently sells at $4.50.What is the time value of the option?

Accepted Answer

intrinsic value = 17.50 - 15 = 2.50
time value = 4.50-2.50 = 2

Question 12

An option that gives the owner the right to buy or sell an asset at a fixed price only on the expiration date,is called a(n)

Accepted Answer

A European option gives the owner the right to buy or sell an asset at a fixed price only on the expiration date. In contrast, an American option allows the owner to exercise the option at any time up to and including the expiration date. Asian options have a payoff determined by the average price of the underlying asset over a period of time, while exotic options have features that are not present in standard options, such as the ability to vary the strike price or the expiration date. Therefore, based on the given description, the closest match is the European option.

Question 13

Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $50,what is your net profit (or loss)? Ignore transaction costs.

Accepted Answer

option expires out of the money
loss = 10(2.75)= 27.50

Question 14

When a call option's strike price is less than the current price of the underlying asset,the call is said to be

Accepted Answer

A call option is said to be in the money when the strike price is below the current price of the underlying asset. This means that the option would be profitable if it were exercised immediately, as the holder could buy the asset at the strike price and immediately sell it for a higher market price.

Question 15

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $20 and currently sells at $4.50.What is the intrinsic value of the option?

Accepted Answer

option is out of the money: intrinsic value = 0

Question 16

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $15 and currently sells at $4.50.What is the intrinsic value of the option?

Accepted Answer

17.50-15 = 2.50

Question 17

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $15 and currently sells at $4.50.What is the intrinsic value of the option?

Accepted Answer

the option is out of the money,thus the intrinsic value = 0

Question 18

According to the Black and Scholes option pricing model,which of the following will lead to an increase in the value of a call option?

Accepted Answer

According to the Black and Scholes option pricing model, an increase in the risk-free rate will increase the value of a call option. This is because the higher the risk-free rate, the higher the opportunity cost of not investing in the risk-free asset, and the greater the potential benefit of using the call option to invest in the underlying asset. Decreases in the price of the underlying asset or time to expiration will decrease the value of the call option.

Question 19

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $20 and currently sells at $4.50.What is the time value of the option?

Accepted Answer

intrinsic value = 20 - 17.50 = 2.50
time value = 4.50-2.50 = 2

Question 20

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $15 and currently sells at $4.50.What is the time value of the option?

Accepted Answer

intrinsic value = 0
time value = 4.50

Quiz 19: Options

Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $48,what is your net profit (or loss) ? Ignore transaction costs.