Portfolio Management【 Reading 56】Sample 2012, create, following, one

kmf229

Referring to put-call parity, which one of the following alternatives would allow you to create a synthetic riskless pure-discount bond?

A) Buy a European put option; sell the same stock; sell a European call option.

B) Buy a European put option; buy the same stock; sell a European call option.

C) Sell a European put option; sell the same stock; buy a European call option.

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According to put-call parity we can write a riskless pure-discount bond position as:
X/(1+Rf)T = P0 + S0 – C0.

We can then read off the right-hand side of the equation to create a synthetic position in the riskless pure-discount bond. We would need to buy the European put, buy the same underlying stock, and sell the European call.

HuskyGrad2010

Which of the following statements is most accurate?

A) American options on forwards are more valuable than comparable European options on forwards.

B) European options on futures are more valuable than comparable American options on futures.

C) American options on futures are more valuable than comparable European options on futures.

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Because of the mark-to-market feature of futures contracts, American options on futures are more valuable than comparable European options. The value of American and European options on forwards are the same.

HuskyGrad2010

Regarding deep in-the-money options on forwards, it is:

A) never worthwhile to exercise puts or calls early.

B) sometimes worthwhile to exercise calls early but not puts.

C) sometimes worthwhile to exercise both calls and puts early.

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Unlike futures, forwards do not generate any cash at exercise even when they are deep in-the-money so there is no advantage to early exercise.

HuskyGrad2010

Regarding deep in-the-money options on futures, it is:

A) sometimes worthwhile to exercise both calls and puts early.

B) sometimes worthwhile to exercise calls early but not puts.

C) never worthwhile to exercise puts or calls early.

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If puts or calls on futures are significantly in-the-money it may be worthwhile to exercise them early to generate the cash from the immediate mark to market of the futures contract when the option is exercised.

HuskyGrad2010

Early exercise of in-the-money American options on:

A) both futures and forwards is sometimes worthwhile.

B) futures is sometimes worthwhile but never is for options on forwards.

C) forwards is sometimes worthwhile but never is for options on futures.

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Early exercise of in-the-money American options on futures is sometimes worthwhile because the immediate mark to market upon exercise will generate funds that can earn interest. It is never worthwhile for options on forwards because no funds are generated until the settlement date of the forward contract.

HuskyGrad2010

Which of the following is a correct specification of put-call parity for options on futures?

A)

B)

C)

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Begin with put-call parity for a stock, and substitute

HuskyGrad2010

Which of the following would have the same value at t = 0 as an at-the-money call option on a forward contract priced at FT (the forward price at time = 0)?

A) A put option, long the underlying asset, and short a risk-free bond that pays X-FT at option expiration.

B) A put option, long the underlying asset, and short a risk-free bond that matures at X at option expiration.

C) A put option on the forward at exercise price (X).

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Put-call parity for options on forward contracts is c0 + (X – FT) / (1+R)T = p0. Since X = FT for an at-the-money option, the put and the call have the same value for an at-the-money option.

HuskyGrad2010

Put-call parity for options on forward contracts at the initiation of the option where the forward price at that time (time=0) is FT, can best be expressed as:

A) c0 + X / (1 + R)T − FT = p0.

B) c0 + (X − FT) / (1 + R)T = p0.

C) c0 − (X − FT) / (1 + R)T = p0.

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Put call parity for stocks (with discrete time discounting) is c0 + X / (1 + R)T − S0 = p0. Noting that for the forward contract on an asset with no underlying cash flows, S0 = FT / (1 + R)T, and substituting, we get c0 + (X − FT) / (1 + R)T = p0.

HuskyGrad2010

At time = 0, for a put option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in:

A) the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.

B) a risk-free pure-discount bond that pays FT – X at option expiration and long in a put at X.

C) a call at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.

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Utilizing the basic put/call parity equation, we're looking for a portfolio that is equal to the portfolio mentioned in the stem (a put option). The put-call parity equation is c0 + (X – FT) / (1+R)T = p0. Since (X – FT) / (1+R) is actually just the present value of the bond at expiration, the relationship can be simplified to long call + long bond = put.

HuskyGrad2010

If we use four of the inputs into the Black-Scholes-Merton option-pricing model and solve for the asset price volatility that will make the model price equal to the market price of the option, we have found the:

A) implied volatility.

B) option volatility.

C) historical volatility.

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The question describes the process for finding the expected volatility implied by the market price of the option.