1. Suppose that you have purchased GE shares. You are worrying about decrease in the price of the GE shares that you own. Which of the followings in (1), (2), (3) and (4) can be used to hedge the risk?

(1) Long call options on GE stock

(2) Short call options on GE stock

(3) Long put options on GE stock

(4) Short put options on GE stock

A. Only (1)

B. Only (2)

C. Only (3)

D. Only (4)

E. Either (1) or (4)

F. Either (2) or (3)

2. Consider two call options on the same stock with the same expirations with strike prices of K1 and K2, respectively. The prices of the two options are c1 and c2. Suppose K1 < K2. Then, what is correct below?

A. c1 = c2

B. c1 > c2

C. c1 < c2

D. cannot determine.

3. You own a house that costs $1 million. You buy a $20,000 insurance policy to compensate you for damage to the house. The dectible is $40,000. How much is the maximum that the insurance company may pay for the damage on your house.

less than 500,000

higher than 500,000 but less than 700,000.

higher than 700,000 but less than 900,000.

higher than 900,000 but less than 1,1000,000.

Higher than 1,100,000.