Project #83884 - Finance(Derivatives)

 

1.The following information is given about options on the stock of a certain company.

 

S0 = 23                        X = 20

 

rc = 0.09                      T = 0.5

 

s2 = 0.15

 

No dividends are expected.

 

What value does the Black-Scholes-Merton model predict for the call? (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 cents.)

 

a. 5.35

 

b. 1.10

 

c. 4.73

 

d. 6.50

 

e. none of the above

 

2. The following information is given about options on the stock of a certain company.

 

S0 = 23                        X = 20

 

rc = 0.09                      T = 0.5

 

s2 = 0.15

 

No dividends are expected.

 

Use this information to answer questions 1 and 2.

 

Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation? (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 10 shares.)

 

Select one:

 

a. buy 791 shares, sell 1,000 calls

 

b. buy 705 shares, sell 1,000 calls

 

c. sell short 791 shares, buy 1,000 calls

 

d. sell short 705 shares, buy 1,000 calls

 

e. none of the above

 

3. Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?

 

Select one:

 

a. the volatility

 

b. the risk-free rate

 

c. the stock price

 

d. the time to expiration

 

e. the exercise price

 

4.The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?

 

a. when the number of time periods is large

 

b. when the option is at-the-money

 

c. when the option is in-the-money

 

d. when the option is out-of-the-money

 

e. none of the above

 

5.What is the reason for executing a gamma hedge?

 

a. the volatility can change

 

b. the stock price can make a large move

 

c. the stock price moves are too small for a delta hedge to work

 

d. there is no true risk-free rate

 

e. none of the above

 

 

 

6.Which of the following statements about the volatility is not true?

 

 

 

a. the implied volatility often differs across options with different exercise prices

 

b. the implied volatility equals the historical volatility if the option is correctly priced

 

c. the implied volatility is determined by trial and error

 

d. the implied volatility is nearly linearly related to the option price

 

e. none of the above

 

7.Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 7 and 8.

 

What is your profit if you buy a call, hold it to expiration and the stock price at expiration is $37?

 

a. $32.89

 

b. $30.00

 

c. $27.11

 

d. $32.15

 

e. there is no breakeven

 

8. Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 7 and 8.

 

What is the break even stock price at expiration on the transaction described in problem 1?

 

a. $32.89

 

b. $30.00

 

c. 27.11

 

d. $32.15

 

9. Consider two put options differing only by exercise price. The one with the higher exercise price has

 

Select one:

 

a. the lower breakeven and lower profit potential

 

b. the lower breakeven and greater profit potential

 

c. the higher breakeven and greater profit potential

 

d. the higher breakeven and lower profit potential

 

e. the greater premium and lower profit potential

 

10.Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?

 

a. the profit is greater at all stock prices

 

b. the profit is greater only at low stock prices

 

c. the profit is greater only at high stock prices

 

d. the range of possible profits is greater

 

e. none of the above are true

 

11. Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price?

 

a. the breakeven is lower

 

b. the maximum loss is greater

 

c. the insurance is less costly

 

d. the insurance is more costly

 

e. none of the above

 

12. What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

 

 

 

a. the call premium is essentially thrown away

 

b. transaction costs tend to be high

 

c. the stock will incur losses

 

d. the call is more expensive when rolled over

 

e. none of the above

 

13. A synthetic long call position can be created with which of the following sets of transactions.

 

Select one:

 

a. borrow the present value of the strike price, sell stock, sell put

 

b. lend the present value of the strike price, sell stock, buy put

 

c. sell put, buy stock, lend the present value of the strike price

 

d. buy stock, buy put, borrow the present value of the strike price

 

e. none of the above creates a synthetic long call position

 

14. A synthetic short put position can be created with which of the following sets of transactions.

 

a. borrow the present value of the strike price, sell stock, sell call

 

b. lend the present value of the strike price, sell stock, buy call

 

c. sell call, buy stock, lend the present value of the strike price

 

d. buy stock, buy call, borrow the present value of the strike price

 

e. none of the above creates a synthetic long call position

 

15. The following prices are available for call and put options on a stock priced at $50.  The risk-free rate is 6 percent and the volatility is 0.35.  The March options have 90 days remaining and the June options have 180 days remaining.  The Black-Scholes model was used to obtain the prices.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

 Use this information to answer questions 1 through 20.  Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.

 

For questions 15 through 17, consider a bull money spread using the March 45/50 calls.

 

How much will the spread cost?

 

a. $986

 

b. $302

 

c. $283

 

d. $193

 

e. none of the above

 

16

 

The following prices are available for call and put options on a stock priced at $50.  The risk-free rate is 6 percent and the volatility is 0.35.  The March options have 90 days remaining and the June options have 180 days remaining.  The Black-Scholes model was used to obtain the prices.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

 Use this information to answer questions 1 through 20.  Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.

 

For questions 15 through 17, consider a bull money spread using the March 45/50 calls.

 

What is the maximum profit on the spread?

 

a. $500

 

b. $802

 

c. $198

 

d. $302

 

e. none of the above

 

17. The following prices are available for call and put options on a stock priced at $50.  The risk-free rate is 6 percent and the volatility is 0.35.  The March options have 90 days remaining and the June options have 180 days remaining.  The Black-Scholes model was used to obtain the prices.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

 Use this information to answer questions 1 through 20.  Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.

 

For questions 15 through 17, consider a bull money spread using the March 45/50 calls.

 

What is the maximum loss on the spread?

 

a. $500

 

c. $198

 

d. $802

 

e. none of the above

 

18. For questions 18 and 19, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

What will be the cost of the butterfly spread?

 

a. $1,195

 

b. $637

 

c. $79

 

d. $1,045

 

e. none of the above

 

19. For questions 18 and 19, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

What will be the profit if the stock price at expiration is $52.50?

 

a. $171

 

b. $1,421

 

c. $1.037

 

d. $421

 

e. none of the above

 

20. The following prices are available for call and put options on a stock priced at $50.  The risk-free rate is 6 percent and the volatility is 0.35.  The March options have 90 days remaining and the June options have 180 days remaining.  The Black-Scholes model was used to obtain the prices.

 

 

Calls

Puts

Strike

March

June

March

June

45

6.84

8.41

1.18

2.09

50

3.82

5.58

3.08

4.13

55

1.89

3.54

6.08

6.93

 

This question is about a long box spread using the June 50 and 55 options.

 

What is the cost of the box spread?

 

a. $500

 

b. $2,018

 

c. $76

 

d. $484

 

e. none of the above

 

21. What is the profit if the stock price at expiration is $52.50?

 

 

 

a. $16

 

b. $500

 

c. -$234

 

d. $250

 

e. none of the above

 

22. What is the net present value of the box spread?

 

a. $9.84

 

b. $5.00

 

c. $16.00

 

d. $1.84

 

e. none of the above

 

23. Which of the following strategies does not profit in a rising market?

 

a. put bull spread

 

b. long straddle

 

c. collar

 

d. call bull spread

 

e. none of the above

 

24

 

Which of the following transactions can have an unlimited loss?

 

a. long straddle

 

b. calendar spread

 

c. butterfly spread

 

d. reverse box spread

 

e. none of the above

 

Subject Business
Due By (Pacific Time) 09/27/2015 09:42 am
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