LOS i: Explain how option prices are affected by the exercise price and the time to expiration.

Q1. 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

Q2. 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.

Q3. 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 at least as much as the shorter-term option.

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

Q4. For two European call options that differ only in time to expiration, the strongest statement we can make is that:

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

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

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

Q5. 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 more than the 30 call.

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

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

Q6. 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.

LOS i: Explain how option prices are affected by the exercise price and the time to expiration. fficeffice" />

Q1. 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

Correct answer is B)

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.

Q2. 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.

 Correct answer is B)

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

Q3. 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 at least as much as the shorter-term option.

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

Correct answer is C)

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

Q4. For two European call options that differ only in time to expiration, the strongest statement we can make is that:

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

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

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

Correct answer is C)

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

Q5. 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 more than the 30 call.

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

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

Correct answer is C)

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.

Q6. 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.

Correct answer is C)

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).

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