Multiple Choice

1. The ABC Company expects stock prices to decrease. The current stock price is $96. The company purchases a put option, with exercise price of $93 and a premium of $3 per share. Assume instead that the stock price was $88 just before the expiration date. Should the investor exercise the put option or not? What will the total payoff per share be?

A.	Do not exercise, total payoff = -$2 per share

B.	Do not exercise, total payoff = -$1 per share

C.	Exercise, total payoff = -$1 per share

D.	Exercise, total payoff = $1 per share

E.	Exercise, total payoff = $2 per share

2. The XYZ Company expects stock prices to increase. The current stock price is $37. The company purchases a call option, with an exercise price of $40 and a premium of $2 per share. What is the minimum market price at which the investor should exercise the call option?

$36

$37

$38

$39

$40

3. An investor would like to invest in stock market, but does not have sufficient funds for the next two months. Thus, the investor buys an S&P 500 futures contract with a September settlement date when the S&P 500 index is at the level of 1,700. By the settlement date, the S&P 500 index falls to 1,575. What is the investors profit or loss on the S&P 500 index futures in dollars?

1,700; profit

1,700; loss

31,250; profit

31,250; loss

none of the above

4. For Put Options, the __________ the existing market price of the underlying financial instrument relative to the exercise price, the ____________ option premium.

higher; higher

higher; lower

lower; lower

lower; higher

Both b and d are correct