CHAPTER 24
MULTIPLE CHOICE PROBLEMS
USE THE FOLLOWING INFORMATION FOR THE NEXT SIX PROBLEMS
62,500 GERMAN MARK EUROPEAN STYLE
CALLS PUTS
69 DEC $0.038
66.5 DEC $0.032
(d) 1 How much must an investor pay for the German Mark call option?
a) $380.00
b) $3,800.00
c) $62.50
d) $2,375.00
e) $625.00
(c) 2 How much must an investor pay for the German Mark put option?
a) $3,800.00
b) $6,250.00
c) $2,000.00
d) $3,200.00
e) $3.20
(c) 3 If the spot rate at expiration is 75.1 and the call option was purchased, what is the dollar gain or loss?
a) $0
b) $3750.00 gain
c) $1375.00 gain
d) $3750.00 loss
e) $1375.00 loss
(b) 4 If the spot rate at expiration is 72.3 and the call option was purchased, what is the dollar gain or loss?
a) $123.00 gain
b) $312.50 loss
c) $312.50 gain
d) $2,375.00 gain
e) $0, the option expires worthless.
(a) 5 If the spot rate at expiration is 65.3 and the put option was purchased, what is the dollar gain or loss?
a) $1,250.00 loss
b) $1,250.00 gain
c) $750.00 gain
d) $750.00 loss
e) $2,000.00 loss
(d) 6 If the spot rate at expiration is 61.4 and the put option was purchased, what is the dollar gain or loss?
a) $0, the option expires worthless.
b) $2,000.00 loss
c) $2,000.00 gain
d) $1,187.50 gain
e) $1,187.50 loss
USE THE FOLLOWING INFORMATION FOR THE NEXT TEN PROBLEMS
XYZ CORP
EXERCISE NYSE
DATE PRICE PRICE CLOSE
CALLS OCT 85 16 3/4 101 11/16
OCT 90 12 101 11/16
OCT 95 7 5/8 101 11/16
PUTS OCT 85 1/8 101 11/16
OCT 90 3/8 101 11/16
OCT 95 13/16 101 11/16
(a) 7 If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $18.75 loss
b) $18.75 gain
c) $1,668.75 gain
d) $1,668.75 loss
e) $1,687.50 loss
(d) 8 If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $1,687.50 loss
b) $3,362.50 loss
c) $3,675.50 gain
d) $13.00 gain
e) $13.00 loss
(e) 9 If you establish a long strip using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $1,668.75 gain
b) $1,700.00 gain
c) $1,700.00 loss
d) $31.25 gain
e) $31.25 loss
(a) 10 If you establish a long straddle using the options with an 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $68.75 loss
b) $68.75 gain
c) $37.50 loss
d) $1,200.00 loss
e) $1,200.00 gain
(c) 11 If you establish a long strap using the options with an 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $37.50 loss
b) $37.50 gain
c) $100.00 loss
d) $100.00 gain
e) $2,437.50 loss
(b) 12 If you establish a long strip using the options with an 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $106.25 gain
b) $106.25 loss
c) $1,275.00 loss
d) $1,275.00 gain
e) $75.00 loss
(d) 13 If you establish a long straddle using the options with an 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $668.75 gain
b) $668.75 loss
c) $94.56 gain
d) $94.56 loss
e) $81.25 loss
(d) 14 If you establish a long strap using the options with an 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $81.25 loss
b) $1,606.25 gain
c) $1,606.25 loss
d) $268.75 loss
e) $268.75 gain
(a) 15 If you establish a long strip using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a) $256.25 loss
b) $256.25 gain
c) $925.00 loss
d) $668.75 gain
e) $668.75 loss
(b) 16 If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?
a) $912.50 loss
b) $87.50 gain
c) $87.50 loss
d) $1,000.00 gain
e) $1,000.00 loss
THE following INFORMATION IS FOR THE NEXT TWO PROBLEMS
A stock currently trades for $120 per share. Options on the stock are available with a strike price of $125. The options expire in 30 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
(d) 17 Use the Black-Scholes option pricing model to calculate the price of a call option.
a) $5.935
b) $4.935
c) $3.935
d) $2.935
e) None of the above
(a) 18 Calculate the price of the put option.
a) $7.623
b) $8.623
c) $9.623
d) $10.623
e) None of the above
(a) 19 Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $65.
a) $71.75
b) $76.75
c) $58.25
d) $81.75
e) None of the above
(d) 20 Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $80.
a) $81.75
b) $73.25
c) $86.75
d) $76.75
e) None of the above
(d) 21 Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase the stock if the price after 35 days is $70.
a) $77.75
b) $87.25
c) $82.25
d) $72.75
e) None of the above
(a) 22 Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you sell a put with a strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase the stock if the price after 35 days is $85.
a) $77.75
b) $87.25
c) $82.25
d) $72.75
e) None of the above.
USE THE FOLLOWING INFORMATION FOR THE NEXT 12 QUESTIONS
Consider the following information on put and call options for Citigroup
Strike Price Put Price Call Price
$32.50 $2.85 $1.65
(b) 23 Calculate the net value of a protective put position at a stock price at expiration of $20, and a stock price at expiration of $45.
a) $6.35, $18.85
b) $29.65, $42.15
c) $21.65, $34.15
d) $8, $8
e) -$8, -$8
(b) 24 A protective put is an appropriate strategy if
a) An investor wishes to generate additional income.
b) An investor wished to insure against a decline in share values.
c) An investor expected share prices to be volatile.
d) An investor expected share prices to remain in a trading range.
e) An investor expected share prices to be volatile, but was inclined to be bullish.
(c) 25 Calculate the net value of a covered call position at a stock price at expiration of $20, and a stock price at expiration of $45.
a) $6.35, $18.85
b) $29.65, $42.15
c) $21.65, $34.15
d) $8, $8
e) -$8, -$8
(a) 26 A covered call is an appropriate strategy if
a) An investor wishes to generate additional income.
b) An investor wished to insure against a decline in share values.
c) An investor expected share prices to be volatile.
d) An investor expected share prices to remain in a trading range.
e) An investor expected share prices to be volatile, but was inclined to be bullish.
(d) 27 Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
a) $6.35, $18.85
b) $29.65, $42.15
c) $21.65, $34.15
d) $8, $8
e) -$8, -$8
(c) 28 A long straddle is an appropriate strategy if
a) An investor wishes to generate additional income.
b) An investor wished to insure against a decline in share values.
c) An investor expected share prices to be volatile.
d) An investor expected share prices to remain in a trading range.
e) An investor expected share prices to be volatile, but was inclined to be bullish.
(e) 29 Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
a) $6.35, $18.85
b) $29.65, $42.15
c) $21.65, $34.15
d) $8, $8
e) -$8, -$8
(d) 30 A short straddle is an appropriate strategy if
a) An investor wishes to generate additional income.
b) An investor wished to insure against a decline in share values.
c) An investor expected share prices to be volatile.
d) An investor expected share prices to remain in a trading range.
e) An investor expected share prices to be volatile, but was inclined to be bullish.
(a) 31 Calculate the payoffs of a long strap at a stock price at expiration of $20 and a stock price at expiration of $45.
a) $6.35, $18.85
b) $29.65, $42.15
c) $21.65, $34.15
d) $8, $8
e) -$8, -$8
(e) 32 A long strap is an appropriate strategy if
a) An investor wishes to generate additional income.
b) An investor wished to insure against a decline in share values.
c) An investor expected share prices to be volatile.
d) An investor expected share prices to remain in a trading range.
e) An investor expected share prices to be volatile, but was inclined to be bullish.
CHAPTER 23
ANSWERS TO PROBLEMS
1 ($/DM)(.038)(62,500 DM) = $2,375.00
2 ($/DM)(.032)(62,500 DM) = $2,000.00
3 Cost = $2,375.00
Payoff = (.751 - .690)(62,500) = $3,750.00
Net gain = $3750.00 - $2,375.00 = $1,375.00
4 Cost = $2,375.00
Payoff = (.723 - .690)(62,500) = $2,062.50
Loss = $2,062.50 - $2,375.00 = -$312.50
5 Cost = $2,000.00
Payoff = (.665 - .653)(62,500) = $750.00
Loss = $750.00 - $2,000.00 = -$1,250.00
6 Cost = $2,000.00
Payoff = (.665 - .614)(62,500) = $3,187.50
Gain = $3,187.50 - $2,000.00 = $1,187.50
7 Long straddle: purchase one OCT 85 put and one OCT 85 call
Cost of one call = 16 3/4(100) = $1,675.00
Cost of one put = 1/8(100) = $12.50
Total cost = $1,687.50
Payoff on one call = 100(101 11/16 - 85) = $1,668.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,668.75 - $1,687.50 = $18.75 loss
8 Long strap: purchase two OCT 85 calls and one OCT 85 put
Cost of 2 calls = 2(16.75(100) = $3,350.00
Cost of one put = 1/8(100) = $12.50
Total cost = $3,362.50
Payoff on 2 calls = 2(100)(101 11/16 - 85) = $3,375.00
Payoff on one put = 0, expires out of the money
Net gain/loss = $3,375.50 - $3,362.50 = $13.00 gain
9 Long strip: purchase one OCT 85 call and two OCT 85 puts
Cost of one call = 16 3/4(100) = $1,675.00
Cost of two puts = 2(1/8)(100) = $25.00
Total cost = $1,700.00
Payoff on one call = 100(101 11/16 - 85) = $1,668.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $1,668.75 - $1,700.00 = $31.25 loss
10 Long straddle: purchase one OCT 90 put and one OCT 90 call
Cost of one call = 12(100) = $1,200.00
Cost of one put = 3/8(100) = $37.50
Total cost = $1,237.50
Payoff on one call = 100(101 11/16 - 90) = $1,168.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,168.75 - $1,237.50 = $68.75 loss
11 Long strap: purchase two OCT 90 calls and one OCT 90 put
Cost of 2 calls = 2(12.00(100) = $2,400.00
Cost of one put = 3/8(100) = $37.50
Total cost = $2,437.50
Payoff on 2 calls = 2(100)(101 11/16 - 90) = $2,337.50
Payoff on one put = 0, expires out of the money
Net gain/loss = $2,337.50 - $2,437.50 = $100.00 loss
12 Long strip: purchase one 90 call and two OCT 90 puts
Cost of one call = 12(100) = $1,200.00
Cost of two puts = 2(3/8)(100) = $75.00
Total cost = $1,275.00
Payoff on one call = 100(101 11/16 - 90) = $1,168.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $1,168.75 - $1,275.00 = $106.25 loss
13 Long straddle: purchase one OCT 95 put and one OCT 95 call
Cost of one call = 7 5/8(100) = $762.50
Cost of one put = 13/16(100) = $81.25
Total cost = $763.31
Payoff on one call = 100(101 11/16 - 95) = $668.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $668.75 - $763.31 = $94.56 loss
14 Long strap: purchase two OCT 95 calls and one OCT 95 put
Cost of 2 calls = 2(7 5/8)(100) = $1,525.00
Cost of one put = 13/16(100) = $81.25
Total cost = $1,606.25
Payoff on 2 calls = 2(100)(101 11/16 - 95) = $1,337.50
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,337.50 - $1,606.25 = $268.75 loss
15 Long strip: purchase one 95 call and two OCT 95 puts
Cost of one call = 7 5/8(100) = $762.50
Cost of two puts = 2(13/16)(100) = $162.50
Total cost = $925.00
Payoff on one call = 100(101 11/16 - 95) = $668.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $668.75 - $925.00 = $256.25 loss
16 Bull money spread = buy the in-the-money call, i.e., OCT 85 and sell the out-of-the-money call, i.e., OCT 95
Cost of buying OCT 85 call = 100(16 3/4) = $1,675.00
Proceeds from selling OCT 95 call = 100(7 5/8) = $762.50
Net cost $912.50
Payoff on OCT 85 call = 100(110 - 85) = $2,500.00
Payoff on OCT 95 call = 100(110 - 95) = ($1,500.00)
Net payoff = $2,500.00 - 1,500.00 = $1,000.00
Total gain/loss = $1,000.00 - 912.50 = $87.50 gain
17 Price using the B-S option pricing model
d1 = ln(120/125) + [(.03 + 5(.352))(.0833)]/(.35(.0833.5))
= -0.3288
d2 = -0.3288 - (.35(.0833.5)) = -0.4298
N(d1) = 0.3712
N(d2) = 0.3337
Call price = Pc = 120[0.3712 – 125(e-.03(.0833))(0.3337]
= $2.935
18 Put price = 2.935 + 125(e-.03(.0833)) – 120 = $7.623
19 The effective price is 65 + 6.75 = $71.75
The option expires worthless so your effective price is
the current price plus the option premium.
20 The effective price is 70 + 6.75 = $76.75
The option is exercised so your effective price is
the strike price plus the option premium.
21 The effective price is 80 – 7.25 = $72.75
The option is exercised so your effective price is
the strike price less the option premium.
22 The effective price is 85 – 7.25 = $77.75
The option expires worthless so your effective price is
the current price less the option premium.
23 At S = 20
Net value of protective put = (32.5 – 20) – 2.85 + 20 = 29.65
At S = 45
Net value of protective put = – 2.85 + 45 = 42.15
24 This strategy is appropriate if an investor wished to insure against a decline in share values.
25 At S = 20
Net value of covered call = 1.65 + 20 = 21.65
At S = 45
Net value of covered call = -(45 – 32.5) + 1.65 + 45 = 34.15
26 This strategy is appropriate if an investor wished to generate additional income.
27 At S = 20
Net payoff on a long straddle = (32.5 – 20) -1.65 – 2.85 = 8
At S = 45
Net payoff on a long straddle = (45 - 32.5) -1.65 – 2.85 = 8
28 This strategy is appropriate if an investor expected share prices to be volatile.
29 At S = 20
Net payoff on a short straddle = -(32.5 – 20) + 1.65 + 2.85 = -8
At S = 45
Net payoff on a long straddle = -(45 - 32.5) + 1.65 + 2.85 = -8
30 This strategy is appropriate if an investor expected share prices to remain in a trading range.
31 At S = 20
Net payoff on a long strap = (32.5 – 20) – (2)(1.65) – 2.85 = 6.35
At S = 45
Net payoff on a long straddle = (2)(45 - 32.5) – (2)(1.65) – 2.85 = 18.85
32 This strategy is appropriate if an investor expected share prices to be volatile.
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