Q2 Part a The maximum payoff that the seller of a European call option can incur is:

a. the strike price

b. unlimited

c. zero

d. the stock price

Part b A speculator can choose between buying 20 shares of a stock for $64 per share and buying 320 European call options on the stock with a strike price of $63.75 for $4 per option. For the second alternative to give a better outcome, the minimum stock price at maturity is:

a. 72

b. 80

c. 68

d. 76

Part c The price of a stock on February 1 is $152. A trader buys 50 call options on the stock with a strike price of $150 when the option price is $4. The options are exercised when the stock price is $158. The trader's net profit or loss is:

a. Gain of $100

b. Loss of $200

c. Loss of $100

d. Gain of $200

Part d

Which of the following best describes the intrinsic value of an option?

a. The lower bound of the option's price

b. It can be negative.

c. The value it would have if the owner could exercise it immediately or not at all.

d. The binomial model price of the option.