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.

---

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 statement best reflects the risk exposure of a put writer?

A) Limited risk.

B) No risk.

C) Unlimited risk.

---

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

hinsafdar

Which statement best reflects the risk exposure of an option buyer?

A) Unlimited risk.

B) Limited risk.

C) No risk.

---

The most any option buyer can lose is the amount paid for the option.

hinsafdar

Using put-call parity, it can be shown that a synthetic European call can be created by a portfolio that is:

A) long the stock, long the put, and short a pure discount bond that pays the exercise price at option expiration.

B) long the stock, long the put, and long a pure discount bond that pays the exercise price at option expiration.

C) long the stock, short the put, and short a pure discount bond that pays the exercise price at option expiration.

---

A stock and a put combined with borrowing the present value of the exercise price will replicate the payoffs on a call at option expiration.

hinsafdar

A fiduciary call is a portfolio that is made up of:

A) a call that is synthetically created from other instruments.

B) a call option and a bond that pays the exercise price of the call at option expiration.

C) a call option and a share of stock.

---

A fiduciary call combines a call option and a bond that pays the exercise price of the call at option expiration.

hinsafdar

Assume that the value of a put option with a strike price of $100 and six months remaining to maturity is $5. For a stock price of $110 and an interest rate of 6%, what value is closest to the corresponding call option with the same strike price and same expiration as the put option?

A) $11.99.

B) $17.87.

C) $12.74.

---

Call value = $110 + $5 – $100 / 1.060.5 = $17.87.

hinsafdar

The put-call parity relation can be adjusted for dividend payments on a stock by which of the following methods?

A) Add the present value of the expected dividend payments to the exercise price.

B) Add the present value of the expected dividend payments to the current stock price.

C) Subtract the present value of the expected dividend payments from the current stock price.

---

The correct adjustment is to subtract the present value of the expected dividend payments from the current stock price.

hinsafdar

The lower bound on European call option prices can be adjusted for cash flows of the underlying asset by:

A) subtracting the present value of the expected dividend payments from the current asset price.

B) adding the present value of the expected dividend payments to the current asset price.

C) subtracting the present value of the expected dividend payments from the exercise price.

---

The correct adjustment is to subtract the present value of the expected dividend payments from the current asset price.

hinsafdar

An increase in the riskless rate of interest, other things equal, will:

A) increase call option values and decrease put option values.

B) decrease call option values and increase put option values.

C) decrease call option values and decrease put option values.

---

An increase in the risk-free rate of interest will increase call option values and decrease put option values.

hinsafdar

For stock options, which of the following will least likely increase put option values and decrease call option values?

A) An increase in the riskless rate of interest.

B) A decrease in the riskless rate of interest.

C) An increase in the exercise price.

---

An increase in the riskless rate of interest will decrease put option values and increase call option values.