Review of Lecture 28 Quiz and Test Questions
1. MB14 A program trade on the New York Stock Exchange is ...
a. one step in a lengthy program designed to exercise in-the-money call options
b. one step in a lengthy program designed to exercise in-the-money put options
c. simultaneous execution of buy or sell orders for more than a dozen securities,
generally ordered by a computer program without human intervention
d. simultaneous execution of buy or sell orders for more than a dozen securities,
generally ordered by a NYSE market specialist
e. simultaneous execution of buy or sell orders by the NYSE Superdot system
2. DS10 A common stock has a current share price of $26.10 . A call option on the stock
with strike of $17.50 has an option price of $6.00 . How much is the arbitrage profit?
a. $2.60
b. $2.30
c. $1.70
d. $2.00
e. $1.50
3. DS19a Many individual investors employ a "buy-and-write" investment strategy that
involves a long stock position and short call position. You implement the strategy by
buying a stock at price $22.55 and writing a call with strike of $27.50 and option price of
$5.40 . In one year you receive the stock's annual dividend of $1.35 and, furthermore,
suppose the stock price has increased 11%. Find the rate of return for this buy-and-write
strategy.
a. 53.8%
b. 59.2%
c. 65.1%
d. 71.6%
e. 48.9%
4. MB26 A program trade on the New York Stock Exchange is the simultaneous execution of
buy or sell orders for at least 15 different securities totaling more than $1 million. Class
and online videos explain that there have been three primary reasons for the explosive
growth during recent years in the proportion of total NYSE trades that results from
program trading. Choose the statement that is most consistent with the explanation.
a. Households with increased access to computerized trading have been able to easily
execute large trades for larger numbers of stocks.
b. During recent decades the management of equity portfolios has shifted away from
financial institutions and into individual households that manage their own pension or
mutual funds.
c. Technological advancements of recent decades have made sophisticated trading
more possible.
d. Two choices, B and C, are correct
e. None of the A-B-C choices are correct
5. MB22 Futures and options are financial securities that help businesses manage risk. Find
below a list of four characteristics (W, X, Y, and Z) that describe these securities. For
each characteristic is a blank into which "futures" or "options" correctly fits.
W: ____ are costly because you have to buy them
X: For one underlying asset there exists one long and one short ____ position
Y: A short ____ position entails an obligation only when the long side chooses to exercise
the contract
Z: A long ____ position entails an obligation, not a right, to either exercise or cash out of
the contract
Choose the statement that correctly matches all characteristics for that type of security.
a. These characteristics, (W Y ), are all that pertain to options
b. These characteristics, (W Y ), are all that pertain to futures
c. These characteristics, (all), are all that pertain to futures
d. These characteristics, ( W X Y Z ), are all that pertain to futures
e. These characteristics, ( W X Y Z ), are all that pertain to options
6. DS3b Suppose a put option with strike of 45 costs $6.40 . If at expiry it returns a payoff
such that the rate of return on the option investment is 150%, what is the underlying
stock price at expiry?
a. $29.00
b. $19.81
c. $26.36
d. $23.97
e. $21.79
7. DS2a Company shares have a current market price of $66.40 . A call option on the
shares has a strike of $65 and a price of $3.20 . If at expiry the percentage change in
shareprice is -14%, what is the rate of return on the speculative call option investment?
a. -133.1%
b. -100.0%
c. -90.9%
d. -110.0%
e. -121.0%
8. DS23 Many individual investors employ a "buy-and-write" investment strategy that
involves a long stock position and short call position. You implement the strategy by
buying a stock at price $31.50 and writing a call with strike of $37.50 and option price of
$5.20 . In one year you receive the stock's annual dividend of $1.60 . Find the maximum
rate of return that this strategy can possibly earn for you.
a. 53.5%
b. 48.7%
c. 36.6%
d. 40.2%
e. 44.2%
9. DS17a The shareprice of Company stock currently is $26.20 . You have $19,000 available
for investing in the good fortunes of the Company. Instead of buying the stock, however,
you pursue a portfolio insurance strategy that invests in a money market account earning
5.00% compounded monthly. Also, you invest in call options on the Company stock with
a strike of $32.50 and option price of $4.90 (assume you can buy fractions of options).
Your allocation assures you that, even in a worst-case scenario, you will not lose more
than $3,000 of your original principal. Suppose that at the conclusion of your 17 month
investment horizon the Company stock has risen 60%. Find the ending wealth for the
investment strategy.
a. $34,943
b. $26,253
c. $31,766
d. $23,867
e. $28,879
10. DS19b Many individual investors employ a "buy-and-write" investment strategy that
involves a long stock position and short call position. You implement the strategy by
buying a stock at price $38.60 and writing a call with strike of $47.50 and option price of
$2.60 . In one year you receive the stock's annual dividend of $2.30 and, furthermore,
suppose the stock price has increased 21%. Find the amount by which the rate of return
for this buy-and-write strategy exceeds the rate of return for the stock-only strategy.
a. 12.2%
b. 13.4%
c. 10.1%
d. 11.1%
e. 9.2%
11. DS8 The Company uses a lot of oil in their production process. Due to the unique nature
of their contracts, they hedge oil price movements by entering long straddle positions
(long call and long put). Currently the spot price of crude oil is $48.00 . For options with
a strike of 40 the call price is $9.50 and put price is $1.05 . Choose the most accurate
statement about outcomes.
a. The only way the straddle loses money is if the price of crude at expiry is between
$29.45 and $50.55
b. When the price of crude at expiry exceeds $50.55 losses from the call exceed the
gains from the put
c. When the price of crude at expiry is less than $29.45 then the losses from the put
exceed the gains from the call
d. The straddle makes money whenever the price of crude at expiry is less than
$50.55
e. The straddle makes money whenever the price of crude at expiry exceeds $29.45
12. DS7b The shareprice of Company stock currently is $16.67 . Due to a pending court case,
there is a lot of uncertainty about the Company and, consequently, you believe the
shareprice might either rise a lot or fall a lot. You do not buy the share. Instead, you buy
one call option that costs $1.50 and you buy one put option that costs $4.83 . For both
options, the strike is 20. Which statement about the Company shareprice at expiry is true
such that your overall rate of return from investment in the options is exactly zero?
a. if the shareprice is $26.33 then profit on the call exactly offsets losses on the put
b. if the shareprice is $22.90 then profit on the put exactly offsets losses on the call
c. if the shareprice is $26.33 then profit on the put exactly offsets losses on the call
d. if the shareprice is $19.91 then profit on the put exactly offsets losses on the call
e. if the shareprice is $19.91 then profit on the call exactly offsets losses on the put
13. DS22 You buy 1 share of stock at $34.10 and also purchase one put option with strike of
$27.50 and option price of $3.80 . What is the stock price at expiry such that your overall
rate of return on the position ("ROR") is 14%?
a. $43.21
b. $57.51
c. $39.28
d. $52.28
e. it's impossible to get this ROR