Question 1

You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to?

Accepted Answer

C) At expiration you will choose to exercise the option since the option is in-the-money. Your payoff will be $41 - $40 = $1 for exercising the option, however to calculate the profit we need to subtract the option premium so:
Profit = $1.00 - $3.25 = -$2.25

Question 2

The Law of One Price requires that ________ must have the same price.

Accepted Answer

The answer of The Law of One Price requires that...

Question 3

Use the figure for the question(s) below. 
-This graph depicts the payoffs of

Accepted Answer

The answer of Use the figure for the question(s) below....

Question 4

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck: 
-How many of the January 2009 call options are in-the-money?

Accepted Answer

B) For a call option to be in-the-money, its current stock price must be greater than the exercise price. The current stock price for Merck is $41.95, so the call options with strike prices of $25.00, $30.00, $35.00, and $40.00 are in-the-money. So there are four call options in-the-money.

Question 5

Graph the payoff at expiration of a short position in a put option with a strike price of $20.

Accepted Answer

The answer of Graph the payoff at expiration of a...

Question 6

You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in- or out-of-the-money?

Accepted Answer

The answer of You have decided to buy 10 January...

Question 7

You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share.How much money will you receive and are these contracts in- or out-of-the-money?

Accepted Answer

The answer of You have decided to sell (write)5 January...

Question 8

The time value of an option is the difference between ________.Because a(n)________ option cannot be worth less than its intrinsic value,it cannot have a negative time value.

Accepted Answer

The time value of an option is the difference between the current option price and its intrinsic value. An American option cannot be worth less than its intrinsic value, so it cannot have a negative time value.

Question 9

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation the term K refers to

Accepted Answer

PV(K) refers to the present value of a future cash flow in which K represents the face value of a zero coupon bond. Therefore, the term K in this equation refers to the price of a zero coupon bond.

Question 10

Which of the following statements is false?

Accepted Answer

B) The deeper out-of-the-money the put option is, the less negative its beta, and the lower is its expected return.

Question 11

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation the term S refers to

Accepted Answer

The term S in the equation refers to the stock's current price. This equation is used in financial models to calculate the value of a call option, where C is the call option value, P is the present value of the payoff at expiration, S is the stock's current price, PV(K) is the present value of the strike price, and PV(Div) is the present value of dividends.

Question 12

Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Rose Industries with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Rose Industries with a strike price of $45.

Accepted Answer

The answer of Rose Industries is currently trading for $47...

Question 13

From the Law of One Price,the value of any security is determined by ________ an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's ________ at the time of expiration.

Accepted Answer

The Law of One Price states that the value of any security is determined by the future cash flows an investor receives from owning it. Therefore, before we can assess what an option is worth, we must determine an option's payoff at the time of expiration. Choice D correctly matches these concepts.

Question 14

The payoff to the holder of a call option is given by:

Accepted Answer

The payoff to the holder of a call option is given by the formula C = max(S - K, 0), where S is the spot price of the underlying asset at expiration and K is the strike price of the option. This formula represents the profit from exercising the option, which occurs only if the spot price is above the strike price (S > K), otherwise the option is not exercised and the payoff is zero.

Question 15

Luther Industries is currently trading for $27 per share.The stock pays no dividends.A one-year European put option on Luther with a strike price of $30 is currently trading for $2.60.If the risk-free interest rate is 6% per year,then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:

Accepted Answer

A) C = P + S - PV(K) - PV(Div)
C = $2.60 + $27 - 11ea7e5a_6e7f_8a38_9a0a_85635959cc05_TB1623_11 - $0 = $1.2981

Question 16

Use the figure for the question(s) below. 
-This graph depicts the payoffs of

Accepted Answer

The graph represents a short position in a call option at expiration, where the payoff increases as the underlying asset's price decreases, up to a certain point (the strike price), and then remains constant.

Question 17

You are long both a put option and a call option on Rockwood stock with the same expiration date.The exercise price of the call option is $40 and the exercise price of the put option is $30.Graph the payoff of the combination of options at expiration.

Accepted Answer

The answer of You are long both a put option...

Question 18

The payoff to the holder of a put option is given by:

Accepted Answer

The payoff to the holder of a put option is given by P = max(K - S, 0), where K is the strike price and S is the spot price at expiration. This formula represents the maximum of either the difference between the strike price and the spot price (if the strike price is higher, indicating a profit for the put option holder) or zero (if the spot price is higher, indicating the option is not exercised because it would result in a loss).

Question 19

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called

Accepted Answer

This strategy is known as a straddle. It is used when the investor believes that the underlying asset will have a significant price movement but is unsure of the direction. By holding both a put and a call option with the same strike price, the investor can profit from whichever direction the price moves in.

Question 20

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation the term C refers to

Accepted Answer

The equation represents the pricing model for a call option, where C is the value of the call option, P is the current stock price, S is the strike price, PV(K) is the present value of the strike price, and PV(Div) is the present value of dividends.

Quiz 14: Financial Options

You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to?

The Law of One Price requires that ________ must have the same price.

Use the figure for the question(s) below. -This graph depicts the payoffs of

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -How many of the January 2009 call options are in-the-money?

Graph the payoff at expiration of a short position in a put option with a strike price of $20.

You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in- or out-of-the-money?

You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share.How much money will you receive and are these contracts in- or out-of-the-money?

The time value of an option is the difference between .Because a(n) option cannot be worth less than its intrinsic value,it cannot have a negative time value.

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term K refers to

Which of the following statements is false?

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term S refers to

From the Law of One Price,the value of any security is determined by an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's at the time of expiration.

The payoff to the holder of a call option is given by:

Use the figure for the question(s) below. -This graph depicts the payoffs of

You are long both a put option and a call option on Rockwood stock with the same expiration date.The exercise price of the call option is $40 and the exercise price of the put option is $30.Graph the payoff of the combination of options at expiration.

The payoff to the holder of a put option is given by:

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term C refers to

Quiz 14: Financial Options

You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to?

The Law of One Price requires that ________ must have the same price.

Use the figure for the question(s) below. -This graph depicts the payoffs of

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -How many of the January 2009 call options are in-the-money?

Graph the payoff at expiration of a short position in a put option with a strike price of $20.

You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in- or out-of-the-money?

You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share.How much money will you receive and are these contracts in- or out-of-the-money?

The time value of an option is the difference between ________.Because a(n) ________ option cannot be worth less than its intrinsic value,it cannot have a negative time value.

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term K refers to

Which of the following statements is false?

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term S refers to

From the Law of One Price,the value of any security is determined by ________ an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's ________ at the time of expiration.

The payoff to the holder of a call option is given by:

Use the figure for the question(s) below. -This graph depicts the payoffs of

You are long both a put option and a call option on Rockwood stock with the same expiration date.The exercise price of the call option is $40 and the exercise price of the put option is $30.Graph the payoff of the combination of options at expiration.

The payoff to the holder of a put option is given by:

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called

Consider the following equation: C = P + S - PV(K) - PV(Div) In this equation the term C refers to

The time value of an option is the difference between .Because a(n) option cannot be worth less than its intrinsic value,it cannot have a negative time value.

From the Law of One Price,the value of any security is determined by an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's at the time of expiration.