Question 1(8 points)

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Which of the following statements is most correct?

Question 1 options:

An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.

As stock price rises, the premium portion of an option on a stock increases because the difference between the price of the stock and the fixed striking price increases.

Issuing options provides companies with a low cost method of raising capital.

The market value of an option depends in part on the option's time to maturity and on the variability of the underlying stock's price.

The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.

Question 2(8 points)

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What is the primary difference between an American call option and a European call option?

Question 2 options:

The American call has a fixed strike price while the European strike price varies over time

An American call is a right to buy while a European call is an obligation to buy

An American call has an expiration date while the European call does not

An American call is written on 100 shares of the underlying security while the European call covers 1,000 shares

An American call can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date

Question 3(8 points)

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Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Question 3 options:

Variability of the stock price.

Option's time to maturity.

Strike price.

All of the above.

Question 4(8 points)

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An investor who writes call options against stock held in his or her portfolio is said to be selling ___________ options.

Question 4 options:

in-the-money

put

naked

covered

out-of-the-money

Question 5(8 points)

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Which of the following statements is CORRECT?

Question 5 options:

Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.

Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Question 6(10 points)

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The current price of a stock is $ 49.42 and the annual risk-free rate is 3.4 percent. A put option with an exercise price of $55 and one year until expiration has a current value of $ 7.64 . What is the value of a call option written on the stock with the same exercise price and expiration date as the put option? Show your answer to the nearest .01. Do not use $ or , in your answer. Because of the limitations of WEBCT random numbers, some of the options may be trading below their intrinsic value. Note, the given interest rate is an effective rate, so for calculation purposes, you need only discount the using the risk free rate, no e x adjustment is needed.Your Answer:

Question 6 options:

Answer

Question 7(10 points)

The current price of a stock is $ 62.26 and the annual effective risk-free rate is 5.0 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $ 5.69 . What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Show your answer to the nearest .01. Do not use $ or , in your answer. Because of the limitations of WEBCT random numbers, some of the options may be trading below their intrinsic value. Hint, to find the present value of the bond, you do not need to make the e x adjustment, simple discount at the risk free rate.Your Answer:

Question 7 options:

Answer

Question 8(10 points)

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Suppose you believe that Du Pont's stock price is going to decline from its current level of $ 84.73 sometime during the next 5 months. For $ 604.94 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $ 84 per share. If you bought a 100-share contract for $ 604.94 and Du Pont's stock price actually changed to $ 71.04 , your net profit (or loss) after exercising the option would be ______? Show your answer to the nearest .01. Do not use $ or , signs in your answer. Use a - sign if you lose money on the contract.

Your Answer:

Question 8 options:

Answer

Question 9(10 points)

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You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

Question 9 options:

-$2,840

-$1,760

-$1,080

$1,080

$1,760

Question 10(10 points)

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The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Question 10 options:

$7.33

$8.12

$8.55

$9.00

Question 11(10 points)

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Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?

Question 11 options:

-$3.10

$16.90

$17.75

$22.50