hinsafdar

Which statement best reflects the risk exposure of a put writer?

A) Limited risk.

B) No risk.

C) Unlimited risk.

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Because stock prices cannot fall below $0, a put writer’s risk is limited to the strike price.

hinsafdar

Which of the following statements about long positions in put and call options is most accurate? Profits from a long call:

A) are positively correlated with the stock price and the profits from a long put are negatively correlated with the stock price.

B) are negatively correlated with the stock price and the profits from a long put are positively correlated with the stock price.

C) and a long put are positively correlated with the stock price.

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For a call, the buyer's (or the long position's) potential gain is unlimited. The call option is in-the-money when the stock price (S) exceeds the strike price (X). Thus, the buyer's profits are positively correlated with the stock price. For a put, the buyer's (or the long position's) potential gain is equal to the strike price less the premium. A put option is in-the-money when X > S. Thus, a put buyer wants a high exercise price and a low stock price. Thus, the buyer's profits are negatively correlated with the stock price.

hinsafdar

Which of the following statements about options is least accurate?

A) If an American option is exercised at expiration, its value will be less than that of a European option.

B) Option prices are generally higher the longer the time until the option expires.

C) For put options, the higher the strike price relative to the stock's underlying price, the more the put is worth.

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The American option cannot be worth less than the European option.

hinsafdar

Consider the following four options on the same underlying instrument:

Option 1: September call, exercise price = $55.
Option 2: September call, exercise price = $60.
Option 3: December put, exercise price = $75.
Option 4: December put, exercise price = $80.

What is most likely the relationship among the values of these options?

September calls

December puts

A) Option 2 > Option 1 Option 3 > Option 4

B) Option 1 > Option 2 Option 4 > Option 3

C) Option 1 > Option 2 Option 3 > Option 4

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For options that differ only by exercise price, a call with a lower exercise price typically has more value than a call with a higher exercise price because the underlying instrument can be purchased at a lower price. A put with a higher exercise price typically has more value than a put with a lower exercise price because the underlying instrument can be sold for a higher price.

hinsafdar

For two American options that differ only in time to expiration, strongest statement we can make is that:

A) the longer-term option must be worth less than the shorter-term option.

B) the longer-term option must be worth at least as much as the shorter-term option.

C) the longer-term option must be worth more than the shorter-term option.

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While longer term options generally are worth more, for far in- or out-of-the-money options, the values could be equal.

hinsafdar

For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option:

A) can be worth more than the shorter-term option.

B) can be worth less than the shorter-term option.

C) can be worth at least as much as the shorter-term option.

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For European puts, it is possible that the longer term option can be less valuable than a shorter-term option.

hinsafdar

For two European call options that differ only in time to expiration, the strongest statement we can make is that:

A) the longer-term option must be worth at least as much as the shorter-term option.

B) no relation can be established between the values of the two calls prior to expiration of the first.

C) the longer-term option must be worth more than the shorter-term option.

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While longer-term options generally are worth more, for far in- or out-of-the-money options, the values could be equal.

hinsafdar

For a European call option X=25 and a European call option X=30 on the same stock with the same time to expiration, the strongest statement we can make is the:

A) 25 call is worth at least as much as the 30 call.

B) 25 call is worth more than the 30 call.

C) 30 call is worth at least as much as the 25 call.

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The strongest statement that we can make is that the 25 call is worth as least as much as the 30 call, although it will generally be worth more.

hinsafdar

For a European call option X = 25 and a European call option X = 30 on the same stock with the same time to expiration it is true that, when the 30 call is at- or in-the-money, the strongest statement we can make is the:

A) 30 call is worth at least as much as the 25 call.

B) value of the 25 call is greater than or equal to the value of the 30 call.

C) value of the 25 call is greater than the value of the 30 call.

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If the 30 call is at- or in-the-money at expiration, the strongest true statement is that the value of the 25 call is greater than the value of the 30 call. Even if the options are out of the money, the 25 call will be more valuable than the 30 call before expiration (although if they are far out of the money and close to expiration, both might have a value of effectively zero).

hinsafdar

Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is 5%. The lower bound for a call option with an exercise price of 50 is:

A) $3.40.

B) $0.

C) $3.00.

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53 − 50/(1.05)60/365 = 3.40.