1) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

Selected Answer $-17.30 (wrong)

a) $-14.50

b) $17.30

c) $-17.30

d) $2.80

e) $14.50

2) Suppose the effective annual interest rate is 10%. Consider a 1-year call option on a stock with an exercise price of $45 and an option premium of $8.23. What profit does the owner of this call earn if the underlying stock is worth $52 when the option is exercised?

a) $16.05

b) $-1.23

c) $-2.05

d) $2.08

e) $7.00

3) Suppose the effective annual interest rate is 10%. Consider a 1-year put option on a stock with an exercise price of $80 and an option premium of $15.66. What profit does the owner of this put earn if the underlying stock is worth $54 when the option is exercised?

a) $26.00

b) $10.34

c) $43.23

d) $8.77

e) $10.77

4) What is the payoff to a short forward position if the forward price is $40 and the underlying stock price at expiration is $60? What would be the payoff to a purchased put option with a strike price of $40 on the same underlying stock expiring at the same time?

a) short forward payoff = $20; put payoff = $0

b) short forward payoff = $0; put payoff = $0

c) short forward payoff = $0; put payoff = $20

d) short forward payoff = $0; put payoff = $20

e) short forward payoff = $20; put payoff = $20

5) Which of the following contracts should be more expensive?

a) A long put option on Stock I with a strike price of $60

b) A short forward contract on Stock I with a forward price of $60

c) Both the call and the forward should be equally valuable.