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Quiz #9

Terms in this set (10)

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called a(n):

American Call
American Put
European Call
European Put
European Put
Which of the following affect the value of an option

Strike Price
Time to Expiration
Volatility of Underlying Asset
All of the above
All of the above
Which one of the following statements is correct concerning options on a stock?

Holding an American put is always more valuable than exercising the put.
Prior to expiration, it is always more valuable to sell a call than to exercise it.
A European put is more valuable than a comparable American put. Prior to expiration, it is always better to exercise an option than to sell it.
Prior to expiration, it is always more valuable to sell a call than to exercise it.
Which term refers to an option that could be exercised right now for a positive payoff, or stated differently, has a positive intrinsic value?

In the money option
At the money option
Out of the money option
A European option
In the money option
Which of the following is true of a forward contract when compared to a futures contract?

Gains and losses are marked to market daily
Contracts are traded on an organized exchange.
Contract terms are negotiated and not standardized.
Contracts are usually closed before maturity.
Contract terms are negotiated and not standardized.
Which of the following is true regarding futures contracts but not option contracts?

The party who is short the contract has unlimited loss potential.
The party who is long the contract has unlimited loss potential.
The party who is long the contract decides whether the contract is exercised.
The party who is long the contract has unlimited profit potential.
The party who is long the contract has unlimited loss potential.
You are looking to buy a call option on a stock that is currently trading for $75. You believe that in one year, the stock could be trading at $90, or it could drop to $65. The option you are considering has a strike price of $68, and the current risk free rate is 6%. Use this information to answer the following questions?

What would be the payoff to the option if the stock ends up being worth $90 at the end of next year?

$0
$22
$90
$7
$22
You are looking to buy a call option on a stock that is currently trading for $75. You believe that in one year, the stock could be trading at $90, or it could drop to $65. The option you are considering has a strike price of $68, and the current risk free rate is 6%. Use this information to answer the following questions?

How much would you need to borrow today in order to make your payoff to the stock and borrowing portfolio match the payoff to the option if the stock ends up being worth $65 at the end of the year?

$90
$84.91
$65
$61.32
$61.32
You are looking to buy a call option on a stock that is currently trading for $75. You believe that in one year, the stock could be trading at $90, or it could drop to $65. The option you are considering has a strike price of $68, and the current risk free rate is 6%. Use this information to answer the following questions?

How many options would you need in order to make the payoff on the options equivalent to the payoff on the stock and borrowing portfolio if the stock price is $90 at the end of the year? In other words, what is your hedge ratio?

1.136 Options
0.95 Options
1.84 Options
2.37 Options
1.136 Options
You are looking to buy a call option on a stock that is currently trading for $75. You believe that in one year, the stock could be trading at $90, or it could drop to $65. The option you are considering has a strike price of $68, and the current risk free rate is 6%. Use this information to answer the following questions?

What is the value of this call option?

$8.39
$7.00
$12.04
$14.21
$12.04
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