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Exam 14: Options and Risk Management

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Question 1

Multiple Choice

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Hedge ratios for long call position are ________ and hedge ratios for long put positions are ________.

A) negative; negative
B) negative; positive
C) positive; negative
D) positive; positive

E) A) and B)
F) C) and D)

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Question 2

Multiple Choice

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You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________.

A) time spread
B) long straddle
C) short straddle
D) money spread

E) B) and C)
F) A) and D)

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Question 3

Multiple Choice

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If a share price increases, the price of a put option on the share will ________ and the price of a call option on the share will ________.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3 and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the share price's future movement?

You are cautiously bullish on the common share of the Wildwood Corporation over the next several months. The current price of the share is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be ________.

The 14 September 2009 price quotation for a Boeing call option with a strike price of $50 due to expire in November is $3.50 while the share price of Boeing is $51. The premium on one Boeing November 50 call contract is ________.

You invest in the share of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.

A one dollar increase in a share's price would result in ________ in the call option's value of ________ than one dollar.

All else the same, an American style option will be ________ valuable than a ________ style option.

The delta of a put option on a share is always ________.

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________.

The share price of Ajax Inc. is currently $105. The share price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date one year from now should be worth ________ today.

An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current share price is $35.10, what is the break-even point for the investor?

Before expiration the time value of an out-of-the money share option is ________.

The current share price of Alcoa is $70 and the share does not pay dividends. The instantaneous risk free rate of return is 6%. The instantaneous standard deviation of Alcoa's shares is 40%. A put option on this share with an exercise price of $75 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold ________ shares of stock per 100 put options to hedge your risk.

You are considering purchasing a put option on a share with a current price of $33. The exercise price is $35 and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be ________.

If you know that a call option will be profitably exercised then the Black-Scholes model price will simplify to ________.

Perfect dynamic hedging requires ________.

A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is ________ and the maximum per share gain to the writer of an uncovered call is ________.

Which of the following is a true statement?