clearlycanadian

Assume that the current price of a stock is $100. A call option on that stock with an exercise price of $97 costs $7. A call option on the stock with the same expiration and an exercise price of $103 costs $3. Using these options what is the expiration profit of a bear call spread if the stock price is equal to $110?

A) -$6.

B) -$2.

C) $2.

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The trader of a bear call spread sells the call with an exercise price below the current stock price and buys the call option with an exercise price above the stock price. Therefore, for a stock price of $110 at expiration of the options, the buyer realizes a payoff of -$13 from his short position and a positive payoff of $7 from his long position for a net payoff of -$6. The revenue of the strategy is $4. Hence the profit is equal to -$2.

clearlycanadian

What is the expiration payoff of a long straddle, with an exercise price $100, if the underlying stock price is $125?

A) $25.

B) -$25.

C) $0.

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A long straddle consists of a long call and put with the same exercise price and the same expiration, at a stock price of $125 the put will expire worthless and the call value will be $25.

clearlycanadian

A stock’s value on the date of option expiration is $88.50. For a call purchased with a $2.20 premium and an exercise price of $85, what is the breakeven price?

A) $86.30.

B) $87.20.

C) $88.50.

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The breakeven price is the exercise price plus the premium. The stock’s value on the date of expiration is not necessary information for this problem.

clearlycanadian

Assume a stock has a value of $100. Using at the money call and put options on that stock with 0.5 years to expiration and a constant interest rate of 6 percent, what is the necessary amount that needs to be invested in a zero coupon risk-free bond in order to synthetically replicate the underlying stock. Which of the following is closest to the correct answer?

A) $103.00.

B) $97.04.

C) $100.00.

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From put-call-parity the investment in the risk-free bond should be the present value of the exercise price of the call and the put. That is, Xe-rt = 100e-(0.06)(0.5) = 97.04.