Question 1

Consider the following options data:  (a) Determine the amount of profit or loss associated with each option, ignoring brokerage fees.
(b) Differentiate a warrant from a right.

Accepted Answer

The answer of Consider the following options data:  (a)...

Question 2

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $800.
B) There would be a profit of $400.
C) There would be a loss of $400.
D) There would be a loss of $800.

Accepted Answer

The investor has the right to sell the stock at $40 per share with the put option. Since the underlying price at expiration is $32, the investor can exercise the option and sell the stock for $40, making a profit of $8 per share. Since the option contract is for 100 shares, the net profit would be $8 x 100 - $400 (cost of buying the option) = $400.

Question 3

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $525.
B) There would be a loss of $125.
C) There would be a loss of $325.
D) There would be a loss of $525.

Accepted Answer

The call option would be out of the money at expiration since the underlying price per share is less than the exercise price. Therefore, the investor would not exercise the option and would lose the entire $325 premium paid.

Question 4

Nico Yong is considering the purchase of 100 shares of Cisco Systems stock at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Assume no brokerage costs or dividends.
(a) What will Nico's profit be on the stock transaction if he decides to buy the stock and its price does increase to $30 per share and he sells?
(b) How much will Nico earn on the option transaction if he purchases the option and the underlying stock price rises to $30?
(c) How much must the stock price rise for Nico to break even on the option transaction?
(d) Based on parts (a) and (b) above, what should Nico do? Explain.

Accepted Answer

The answer of Nico Yong is considering the purchase of...

Question 5

If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $250.
B) There would be a profit of $150.
C) There would be a loss of $250.
D) There would be a loss of $150.

Accepted Answer

The put option gives the holder the right to sell 100 shares at the exercise price of $38. Since the underlying price per share at expiration is $39, the holder of the put option would not exercise the option as it would result in a loss of $1 per share. Therefore, the investor would let the option expire worthless and would lose the premium paid for the option, which is $150. Thus, the investor would incur a loss of $150.

Quiz 17: Hybrid and Derivative Securities

Consider the following options data: (a) Determine the amount of profit or loss associated with each option, ignoring brokerage fees. (b) Differentiate a warrant from a right.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?