MULTIPLE CHOICE PROBLEMS
USE THE FOLLOWING INFORMATION FOR THE NEXT SIX PROBLEMS
62,500
GERMAN MARK
CALLS
69 DEC
$0.038
66.5 DEC
EUROPEAN STYLE
PUTS
$0.032
(d) 1
How much must an investor pay for the German Mark call option?
a)
$380.00
b)
$3,800.00
c)
$62.50
d)
$2,375.00
e)
$625.00
(c) 2
How much must an investor pay for the German Mark put option?
a)
$3,800.00
b)
$6,250.00
c)
$2,000.00
d)
$3,200.00
e)
$3.20
(c) 3
If the spot rate at expiration is 75.1 and the call option was purchased, what is the
dollar gain or loss?
a)
$0
b)
$3750.00 gain
c)
$1375.00 gain
d)
$3750.00 loss
e)
$1375.00 loss
(b) 4
If the spot rate at expiration is 72.3 and the call option was purchased, what is the
dollar gain or loss?
a)
$123.00 gain
b)
$312.50 loss
c)
$312.50 gain
d)
$2,375.00 gain
e)
$0, the option expires worthless.
(a) 5
If the spot rate at expiration is 65.3 and the put option was purchased, what is the
dollar gain or loss?
a)
$1,250.00 loss
b)
$1,250.00 gain
23 - 1
c)
d)
e)
(d) 6
$750.00 gain
$750.00 loss
$2,000.00 loss
If the spot rate at expiration is 61.4 and the put option was purchased, what is the
dollar gain or loss?
a)
$0, the option expires worthless.
b)
$2,000.00 loss
c)
$2,000.00 gain
d)
$1,187.50 gain
e)
$1,187.50 loss
23 - 2
USE THE FOLLOWING INFORMATION FOR THE NEXT TEN PROBLEMS
XYZ CORP
CALLS
PUTS
EXERCISE
DATE
PRICE
OCT
85
OCT
90
OCT
95
OCT
85
OCT
90
OCT
95
NYSE
PRICE CLOSE
16 3/4
101 11/16
12
101 11/16
7 5/8
101 11/16
1/8
101 11/16
3/8
101 11/16
13/16
101 11/16
(a) 7
If you establish a long straddle using the options with an 85 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$18.75 loss
b)
$18.75 gain
c)
$1,668.75 gain
d)
$1,668.75 loss
e)
$1,687.50 loss
(d) 8
If you establish a long strap using the options with an 85 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$1,687.50 loss
b)
$3,362.50 loss
c)
$3,675.50 gain
d)
$13.00 gain
e)
$13.00 loss
(e) 9
If you establish a long strip using the options with an 85 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$1,668.75 gain
b)
$1,700.00 gain
c)
$1,700.00 loss
d)
$31.25 gain
e)
$31.25 loss
(a) 10
If you establish a long straddle using the options with an 90 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$68.75 loss
b)
$68.75 gain
c)
$37.50 loss
d)
$1,200.00 loss
e)
$1,200.00 gain
23 - 3
(c) 11
If you establish a long strap using the options with an 90 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$37.50 loss
b)
$37.50 gain
c)
$100.00 loss
d)
$100.00 gain
e)
$2,437.50 loss
(b) 12
If you establish a long strip using the options with an 90 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$106.25 gain
b)
$106.25 loss
c)
$1,275.00 loss
d)
$1,275.00 gain
e)
$75.00 loss
(d) 13
If you establish a long straddle using the options with an 95 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$668.75 gain
b)
$668.75 loss
c)
$94.56 gain
d)
$94.56 loss
e)
$81.25 loss
(d) 14
If you establish a long strap using the options with an 95 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$81.25 loss
b)
$1,606.25 gain
c)
$1,606.25 loss
d)
$268.75 loss
e)
$268.75 gain
(a) 15
If you establish a long strip using the options with a 95 exercise price, what is
your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a)
$256.25 loss
b)
$256.25 gain
c)
$925.00 loss
d)
$668.75 gain
e)
$668.75 loss
(b) 16
If XYZ were trading at $90/share and you formed a bull money spread, what is
your profit if XYZ is trading at $110 at expiration?
a)
$912.50 loss
b)
$87.50 gain
c)
$87.50 loss
d)
$1,000.00 gain
e)
$1,000.00 loss
23 - 4
THE FOLLOWING INFORMATION IS FOR THE NEXT TWO PROBLEMS
A stock currently trades for $120 per share. Options on the stock are available with a strike price
of $125. The options expire in 30 days. The risk free rate is 3% over this time period, and the
expected volatility is 0.35.
(d) 17
Use the Black-Scholes option pricing model to calculate the price of a call option.
a)
$5.935
b)
$4.935
c)
$3.935
d)
$2.935
e)
None of the above
(a) 18
Calculate the price of the put option.
a)
$7.623
b)
$8.623
c)
$9.623
d)
$10.623
e)
None of the above
(a) 19
Assume that you have just sold a stock for a loss at a price of $75, for tax purposes.
You still wish to maintain exposure to the sold stock. Suppose that you buy a call with
a strike price of $70 and a price of $6.75. Calculate the effective price paid to
repurchase the stock if the price after 35 days is $65.
a) $71.75
b) $76.75
c) $58.25
d) $81.75
e) None of the above
(d) 20
Assume that you have just sold a stock for a loss at a price of $75, for tax purposes.
You still wish to maintain exposure to the sold stock. Suppose that you buy a call with
a strike price of $70 and a price of $6.75. Calculate the effective price paid to
repurchase the stock if the price after 35 days is $80.
a) $81.75
b) $73.25
c) $86.75
d) $76.75
e) None of the above
23 - 5
(d) 21
Assume that you have just sold a stock for a loss at a price of $75, for tax purposes.
You still wish to maintain exposure to the sold stock. Suppose that you sell a put with
a strike price of $80 and a price of $7.25. Calculate the effective price paid to
repurchase the stock if the price after 35 days is $70.
a) $77.75
b) $87.25
c) $82.25
d) $72.75
e) None of the above
(a) 22
Assume that you have just sold a stock for a loss at a price of $75, for tax purposes.
You still wish to maintain exposure to the sold stock. Suppose that you sell a put with
a strike price of $80 and a price of $7.25. Calculate the effective price paid to
repurchase the stock if the price after 35 days is $85.
a) $77.75
b) $87.25
c) $82.25
d) $72.75
e) None of the above.
USE THE FOLLOWING INFORMATION FOR THE NEXT 12 QUESTIONS
Consider the following information on put and call options for Citigroup
Strike Price
$32.50
Put Price Call Price
$2.85
$1.65
(b) 23
Calculate the net value of a protective put position at a stock price at expiration of
$20, and a stock price at expiration of $45.
a)
$6.35, $18.85
b)
$29.65, $42.15
c)
$21.65, $34.15
d)
$8, $8
e)
-$8, -$8
(b) 24
A protective put is an appropriate strategy if
a)
An investor wishes to generate additional income.
b)
An investor wished to insure against a decline in share values.
c)
An investor expected share prices to be volatile.
d)
An investor expected share prices to remain in a trading range.
e)
An investor expected share prices to be volatile, but was inclined to be
bullish.
23 - 6
(c) 25
Calculate the net value of a covered call position at a stock price at expiration of
$20, and a stock price at expiration of $45.
a)
$6.35, $18.85
b)
$29.65, $42.15
c)
$21.65, $34.15
d)
$8, $8
e)
-$8, -$8
(a) 26
A covered call is an appropriate strategy if
a)
An investor wishes to generate additional income.
b)
An investor wished to insure against a decline in share values.
c)
An investor expected share prices to be volatile.
d)
An investor expected share prices to remain in a trading range.
e)
An investor expected share prices to be volatile, but was inclined to be
bullish.
(d) 27
Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a
stock price at expiration of $45.
a)
$6.35, $18.85
b)
$29.65, $42.15
c)
$21.65, $34.15
d)
$8, $8
e)
-$8, -$8
(c) 28
A long straddle is an appropriate strategy if
a)
An investor wishes to generate additional income.
b)
An investor wished to insure against a decline in share values.
c)
An investor expected share prices to be volatile.
d)
An investor expected share prices to remain in a trading range.
e)
An investor expected share prices to be volatile, but was inclined to be
bullish.
23 - 7
(e) 29
Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a
stock price at expiration of $45.
a)
$6.35, $18.85
b)
$29.65, $42.15
c)
$21.65, $34.15
d)
$8, $8
e)
-$8, -$8
(d) 30
A short straddle is an appropriate strategy if
a)
An investor wishes to generate additional income.
b)
An investor wished to insure against a decline in share values.
c)
An investor expected share prices to be volatile.
d)
An investor expected share prices to remain in a trading range.
e)
An investor expected share prices to be volatile, but was inclined to be
bullish.
(a) 31
Calculate the payoffs of a long strap at a stock price at expiration of $20 and a
stock price at expiration of $45.
a)
$6.35, $18.85
b)
$29.65, $42.15
c)
$21.65, $34.15
d)
$8, $8
e)
-$8, -$8
(e) 32
A long strap is an appropriate strategy if
a)
An investor wishes to generate additional income.
b)
An investor wished to insure against a decline in share values.
c)
An investor expected share prices to be volatile.
d)
An investor expected share prices to remain in a trading range.
e)
An investor expected share prices to be volatile, but was inclined to be
bullish.
23 - 8
CHAPTER 23
ANSWERS TO PROBLEMS
1
($/DM)(.038)(62,500 DM) = $2,375.00
2
($/DM)(.032)(62,500 DM) = $2,000.00
3
Cost = $2,375.00
Payoff = (.751 - .690)(62,500) = $3,750.00
Net gain = $3750.00 - $2,375.00 = $1,375.00
4
Cost = $2,375.00
Payoff = (.723 - .690)(62,500) = $2,062.50
Loss = $2,062.50 - $2,375.00 = -$312.50
5
Cost = $2,000.00
Payoff = (.665 - .653)(62,500) = $750.00
Loss = $750.00 - $2,000.00 = -$1,250.00
6
Cost = $2,000.00
Payoff = (.665 - .614)(62,500) = $3,187.50
Gain = $3,187.50 - $2,000.00 = $1,187.50
7
Long straddle: purchase one OCT 85 put and one OCT 85 call
Cost of one call = 16 3/4(100) =
$1,675.00
Cost of one put = 1/8(100) =
$12.50
Total cost =
$1,687.50
Payoff on one call = 100(101 11/16 - 85) = $1,668.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,668.75 - $1,687.50 = $18.75 loss
8
Long strap: purchase two OCT 85 calls and one OCT 85 put
Cost of 2 calls = 2(16.75(100) =
Cost of one put = 1/8(100) =
Total cost =
$3,350.00
$12.50
$3,362.50
Payoff on 2 calls = 2(100)(101 11/16 - 85) = $3,375.00
Payoff on one put = 0, expires out of the money
23 - 9
Net gain/loss = $3,375.50 - $3,362.50 = $13.00 gain
9
Long strip: purchase one OCT 85 call and two OCT 85 puts
Cost of one call = 16 3/4(100) =
$1,675.00
Cost of two puts = 2(1/8)(100) =
$25.00
Total cost =
$1,700.00
Payoff on one call = 100(101 11/16 - 85) = $1,668.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $1,668.75 - $1,700.00 = $31.25 loss
10
Long straddle: purchase one OCT 90 put and one OCT 90 call
Cost of one call = 12(100) =
$1,200.00
Cost of one put = 3/8(100) =
$37.50
Total cost =
$1,237.50
Payoff on one call = 100(101 11/16 - 90) = $1,168.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,168.75 - $1,237.50 = $68.75 loss
11
Long strap: purchase two OCT 90 calls and one OCT 90 put
Cost of 2 calls = 2(12.00(100) =
Cost of one put = 3/8(100) =
Total cost =
$2,400.00
$37.50
$2,437.50
Payoff on 2 calls = 2(100)(101 11/16 - 90) = $2,337.50
Payoff on one put = 0, expires out of the money
Net gain/loss = $2,337.50 - $2,437.50 = $100.00 loss
12
Long strip: purchase one 90 call and two OCT 90 puts
Cost of one call = 12(100) =
$1,200.00
Cost of two puts = 2(3/8)(100) =
$75.00
Total cost =
$1,275.00
Payoff on one call = 100(101 11/16 - 90) = $1,168.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $1,168.75 - $1,275.00 = $106.25 loss
13
Long straddle: purchase one OCT 95 put and one OCT 95 call
Cost of one call = 7 5/8(100) =
Cost of one put = 13/16(100) =
Total cost =
23 - 10
$762.50
$81.25
$763.31
Payoff on one call = 100(101 11/16 - 95) = $668.75
Payoff on one put = 0, expires out of the money
Net gain/loss = $668.75 - $763.31 = $94.56 loss
14
Long strap: purchase two OCT 95 calls and one OCT 95 put
Cost of 2 calls = 2(7 5/8)(100) =
$1,525.00
Cost of one put =
13/16(100) =
$81.25
Total cost =
$1,606.25
Payoff on 2 calls = 2(100)(101 11/16 - 95) = $1,337.50
Payoff on one put = 0, expires out of the money
Net gain/loss = $1,337.50 - $1,606.25 = $268.75 loss
15
Long strip: purchase one 95 call and two OCT 95 puts
Cost of one call = 7 5/8(100) =
Cost of two puts = 2(13/16)(100) =
Total cost =
$762.50
$162.50
$925.00
Payoff on one call = 100(101 11/16 - 95) = $668.75
Payoff on two puts = 0, expires out of the money
Net gain/loss = $668.75 - $925.00 = $256.25 loss
16
Bull money spread = buy the in-the-money call, i.e., OCT 85 and sell the out-ofthe-money call, i.e., OCT 95
Cost of buying OCT 85 call = 100(16 3/4) =
Proceeds from selling OCT 95 call = 100(7 5/8) =
Net cost
Payoff on OCT 85 call = 100(110 - 85) = $2,500.00
Payoff on OCT 95 call = 100(110 - 95) = ($1,500.00)
Net payoff = $2,500.00 - 1,500.00 = $1,000.00
Total gain/loss = $1,000.00 - 912.50 = $87.50 gain
17
Price using the B-S option pricing model
d1 = ln(120/125) + [(.03 + 5(.352))(.0833)]/(.35(.0833.5))
= -0.3288
d2 = -0.3288 - (.35(.0833.5)) = -0.4298
N(d1) = 0.3712
N(d2) = 0.3337
23 - 11
$1,675.00
$762.50
$912.50
Call price = Pc = 120[0.3712 – 125(e-.03(.0833))(0.3337]
= $2.935
18
Put price = 2.935 + 125(e-.03(.0833)) – 120 = $7.623
19
The effective price is 65 + 6.75 = $71.75
The option expires worthless so your effective price is
the current price plus the option premium.
20
The effective price is 70 + 6.75 = $76.75
The option is exercised so your effective price is
the strike price plus the option premium.
21
The effective price is 80 – 7.25 = $72.75
The option is exercised so your effective price is
the strike price less the option premium.
22
The effective price is 85 – 7.25 = $77.75
The option expires worthless so your effective price is
the current price less the option premium.
23
At S = 20
Net value of protective put = (32.5 – 20) – 2.85 + 20 = 29.65
At S = 45
Net value of protective put = – 2.85 + 45 = 42.15
24
This strategy is appropriate if an investor wished to insure against a decline in share
values.
25
At S = 20
Net value of covered call = 1.65 + 20 = 21.65
At S = 45
Net value of covered call = -(45 – 32.5) + 1.65 + 45 = 34.15
26
This strategy is appropriate if an investor wished to generate additional income.
27
At S = 20
Net payoff on a long straddle = (32.5 – 20) -1.65 – 2.85 = 8
At S = 45
Net payoff on a long straddle = (45 - 32.5) -1.65 – 2.85 = 8
28
This strategy is appropriate if an investor expected share prices to be volatile.
29
At S = 20
Net payoff on a short straddle = -(32.5 – 20) + 1.65 + 2.85 = -8
23 - 12
At S = 45
Net payoff on a long straddle = -(45 - 32.5) + 1.65 + 2.85 = -8
30
This strategy is appropriate if an investor expected share prices to remain in a trading
range.
31
At S = 20
Net payoff on a long strap = (32.5 – 20) – (2)(1.65) – 2.85 = 6.35
At S = 45
Net payoff on a long straddle = (2)(45 - 32.5) – (2)(1.65) – 2.85 = 18.85
32
This strategy is appropriate if an investor expected share prices to be volatile.
23 - 13