Angela Lim is a graduate analyst and is thinking of trading options on a part time basis. Angela has come to you for some assistance. Answer the following questions.

A) She is long on a Put with an exercise price of $5 and a current market price of the underlying stock of $3. Will a European or American put option be worth more in the market? (Write down the most appropriate answer.) (2 Marks)

European put option American put option Cannot say

B) Darshan is thinking of going short on a call option of CBA. Which of the following characteristics of the stock will be least beneficial for Darshan. (Write Down the most appropriate answer.) (2 Marks)

Higher volatility Lower volatility Cannot say

C) If Mary held a long call option on ABC shares for which she paid a premium of $2 and the exercise price of that option was $12 and the current market price was $15, then at what market price would the options have:

I. A zero payoff? (Write down the most appropriate answer.) (2 Marks)

$10 $12 $15

II. A zero profit? (Write down the most appropriate answer.) (2 Marks)

$12 $14 $15

D) If Cathy were to buy a put option to sell one unit of RHC at a premium of $8.20 with an exercise price of $50.00 and a current spot price of $54.50, calculate the intrinsic and the time value of the option. (4 Marks)

E) If the spot price of RHC fell to $40 at the expiration date, then Cathy will: (Write Down the most appropriate answer.) (2 Marks)

Make an overall profit Make an overall loss Cannot say

F) If you were not worried about the size of potential losses and wanted to potentially maximise your gains, would it be safer to buy a PUT or a CALL? (Write Down the most appropriate answer.) (2 Marks)

PUT CALL