Question 1

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a 3-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is Tom's dollar gain/loss if at expiration the stock is selling for $105.00 per share?
A) $1000 gain
B) $200 loss
C) $1000 loss
D) $200 gain
E) None of the above

Accepted Answer

Put value = 0, therefore, loss = $2,000.00
Stock (105 - 87)(100) = $1,800.00
Net loss = $2,000 - 1,800 = $200.00 (loss)

Question 2

Assume that you purchased shares of a stock at a price of $35 per share. At this time you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.
A) $25
B) -$2
C) $2
D) -$25
E) $0

Accepted Answer

Profit on stock = 70 - 35 = 25
Profit on call = 35 - 70 + 2 = -23
Total = $2

Question 3

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.
A) $10
B) $50
C) $55
D) -$10
E) $0

Accepted Answer

Put = Max[55 - 65, 0] = $0

Question 4

Exhibit 13-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 13-5. If at expiration Peppy is selling for $47.00, what is Sarah's dollar gain or loss?
A) $25 loss
B) $250 loss
C) $25 gain
D) $250 gain
E) None of the above

Accepted Answer

[(55 - 47 - 8.25) ´ 100] = $25 loss

Question 5

Exhibit 13-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 13-5. If at expiration Peppy is selling for $42.00, what is Sarah's dollar gain or loss?
A) $420 gain
B) $420 loss
C) $475 loss
D) $475 gain
E) None of the above

Accepted Answer

[(55 - 42 - 8.25) ´ 100] = $475 gain

Question 6

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.
A) -$1000
B) $1000
C) $575
D) -$575
E) $0

Accepted Answer

Dollar return = (110 - 120 - 5.75)(100) = -$575

Question 7

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk free bond has a price of $30. Calculate the price of the January put option.
A) $11
B) $24
C) $19
D) $30
E) $25

Accepted Answer

P = 6 + 30 - 25 = $11

Question 8

Exhibit 13-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. $\begin{array}{ccc}
\text { Exercise Price } & \text { Put Price } & \text { Call Price } \
\hline50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$
-Refer to Exhibit 13-6. What should the price be of a call option that expires 6 month from today with a exercise price of $55?
A) $1.33
B) $3.08
C) $4.58
D) $6.07
E) $6.33

Accepted Answer

The answer of Exhibit 13-6
USE THE FOLLOWING INFORMATION TO ANSWER...

Question 9

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk free bond.
A) $120
B) $15
C) $105
D) $116
E) $104

Accepted Answer

Bond price = 115 + 5 - 16 = $104

Question 10

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.
A) $25
B) -$5
C) $0
D) $20
E) $5

Accepted Answer

Call = Max[10 - 15, 0] = $0

Question 11

Exhibit 13-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 13-5. What is Sarah's annualized gain/loss?
A) 11.51% gain
B) 115.15% gain
C) 11.51% loss
D) 115.15% loss
E) None of the above

Accepted Answer

[(55 - 42 - 8.25) ¸ 8.25] ´ 2 = 115.15% gain

Question 12

Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75. October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the August and October options.
A) -$0.50
B) $0
C) $0.50
D) $5
E) -$5

Accepted Answer

Time premium = 6.25 - 5.75 = $0.50

Question 13

Assume that you have purchased a call option with a strike price $60 for $5. At the same time you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.
A) $10
B) -$4
C) $5
D) $6
E) $15

Accepted Answer

Profit on call = (75 - 60) - 5 = 10
Profit on put = -4
Total = $6

Question 14

A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate the arbitrage profit that you can earn.
A) $0
B) $1
C) $5
D) $4
E) None of the above

Accepted Answer

Arbitrage profit = 110 - 105 - 4 = $1

Question 15

Exhibit 13-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 13-5. What is Sarah's annualized gain/loss?
A) 60.60% gain
B) 6.06% loss
C) 60.60% loss
D) 6.06% gain
E) None of the above

Accepted Answer

[(55 - 47 - 8.25) ¸ 8.25] ´ 2 = 6.06% loss

Question 16

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.
A) -$525
B) $1000
C) $0
D) -$1000
E) $525

Accepted Answer

Dollar return = (100 - 110 - 5.25)(100) = -$525

Question 17

Exhibit 13-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. $\begin{array}{ccc}
\text { Exercise Price } & \text { Put Price } & \text { Call Price } \
\hline50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$
-Refer to Exhibit 13-6. What is the value of a synthetic stock created with put and call options that expire in 6 months with an expiration price of $50?
A) $53.04
B) $53.53
C) $54.54
D) $55.03
E) $56.23

Accepted Answer

The value of a synthetic stock is calculated using the formula: Call Price - Put Price + Present Value of Exercise Price. For an exercise price of $50, the calculation is: $5.75 - $1.50 + $50/(1+0.05/2) = $53.04.

Question 18

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.
A) $15
B) $55
C) $35
D) -$15
E) $0

Accepted Answer

Put = Max[35 - 20, 0] = $15

Question 19

Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.
A) $3
B) -$2
C) $2
D) -$3
E) $0

Accepted Answer

Profit on stock = 40 - 35 = 5
Profit on put = -3
Total = $2

Question 20

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.
A) $25
B) $35
C) $0
D) -$10
E) $10

Accepted Answer

Call = Max[45 - 35, 0] = $10

Quiz 13: An Introduction to Derivative Markets and Securities

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a 3-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is Tom's dollar gain/loss if at expiration the stock is selling for $105.00 per share?

Assume that you purchased shares of a stock at a price of $35 per share. At this time you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk free bond has a price of $30. Calculate the price of the January put option.

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk free bond.

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.

Exhibit 13-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 13-5. What is Sarah's annualized gain/loss?

Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75. October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the August and October options.

Assume that you have purchased a call option with a strike price $60 for $5. At the same time you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate the arbitrage profit that you can earn.

Exhibit 13-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 13-5. What is Sarah's annualized gain/loss?

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.