Question 1. Multiple Choice Questions

1. Which of the following is True?

a. Long Put option provides the option to buy the underlying asset for the strike price at

maturity.

b. Short Put option provides the option to sell the underlying asset for the strike price at

maturity.

c. Long Put option provides the option to sell the underlying asset for the strike price at

maturity.

d. All of the above

2. Which of the following is True?

a. Short Call option provides the option to sell the underlying asset for the strike price at

maturity.

b. Long Call option provides the option to sell the underlying asset for the strike price at

maturity.

c. Long Call option provides the option to buy the underlying asset for the strike price at

maturity.

d. All of the above 3. Which of the following is True?

a. An American option can be worth more than the corresponding European option

b. European options are traded in Europe only

c. A European option can be worth more than the corresponding American option

d. None of the above

4. Holding other factors constant, what will happen to European option prices if time-tomaturity (T) increases?

a. Both Put option price and Call option price increase

b. Put option price increases and Call option price decreases

c. Put option price decreases and Call option price increases

d. None of the above

5. When speculators predict that the price of AAPL stock will decrease in the future, they

should consider:

a. Long Put option on AAPL

b. Long Call option on AAPL

c. Short Put option on AAPL

d. None of the above

6. To create a portfolio insurance by hedging against a decrease in the S&P index

(SPX), hedgers should:

a. Long Put options on the SPX

b. Long Call options on the SPX

c. Short Put options on the SPX

d. None of the above

7. A Bear Call Spread is useful when speculators predict:

a. An increase in the price of the underlying

b. A decrease in the price of the underlying

c. No change in the price of the underlying

d. None of the above

8. A Bear Put Spread is useful when speculators predict:

a. An increase in the price of the underlying

b. A decrease in the price of the underlying

c. No change in the price of the underlying

d. None of the above

9. When speculators predict that the price of TSLA stock is going to change volatilely in

either direction, they should consider:

a. Long Butterfly Spread on TSLA

b. Long Condor Spread on TSLA

c. Long Straddle on TSLA

d. None of the above

10. When speculators predict that the price of TSLA stock is stable with limited

movement, they should consider:

a. Long Butterfly Spread on TSLA

b. Long Strangle on TSLA

c. Long Straddle on TSLA

d. None of the above

11. Based on the Lower Bound of European Call Option Price (S0 Ke-rT) and the

information below, which of the following should be the value of the no-arbitrage lower

bound? Assume no dividends.

Spot price (S0) 120

Strike price (K) 100

Risk-free rate (r) 4%

Time-to-maturity (T) 0.5

(note: T = 0.5 means maturity of six months)

a. 17.9799

b. 20

c. 21.9801

d. None of the above

12. Based on Lower Bound of European Put Option Price (Ke-rT S0) and the

information below, which of the following should be the value of the no-arbitrage lower

bound? Assume no dividends.

Spot price (S0) 200

Strike price (K) 250

Risk-free rate (r) 4%

Time-to-maturity (T) 0.25

(note: T = 0.25 means maturity of three months)

a. 47.5125

b. 52.5125

c. -50

d. None of the above