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Exam 14: Options and Risk Management

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Question 31

Multiple Choice

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What strategy could be considered insurance for an investment in a portfolio of shares?

A) Covered call
B) Protective put
C) Short put
D) Straddle

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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The value of a listed put option on a share is lower when ________. I. the exercise price is higher II. the contract approaches maturity III. the share decreases in value IV. a share split occurs

A) II only
B) II and IV only
C) I, II and III only
D) I, II, III and IV

E) All of the above
F) None of the above

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Question 33

Multiple Choice

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You write a put option on a share. The profit at contract maturity of the option position is ________ where X equals the option's strike price, ST is the share price at contract expiration and P0 is the original premium of the put option.

The ________ is the share price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option.

In the Black-Scholes model as the share's price increases the values of N(d1) and N(d2) will ________ for a call and ________ for a put option.

All else equal, call option values are ________ if the ________ is lower.

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realise a ________ on the investment.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ________.

A high dividend payout will ________ the value of a call option and ________ the value of a put option.

A share is trading at $50. You believe there is a 60% chance the price of the share will increase by 10% over the next three months. You believe there is a 30% chance the share will drop by 5% and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of three months?

What combination of variables is likely to lead to the lowest time value?

In the Black-Scholes model if an option is not likely to be exercised both N(d1) and N(d2) will be close to ________. If the option is definitely likely to be exercised N(d1) and N(d2) will be close to ________.

At contract maturity the value of a call option is ________ where X equals the option's strike price and ST is the share price at contract expiration.

You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position is ________.

A writer of a call option will want the value of the underlying asset to ________ and a buyer of a put option will want the value of the underlying asset to ________.

The value of a call option increases with all of the following except ________.

The writer of a put option ________.

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $121 per share. You will realise a ________ on the investment.

Investor A bought a call option and Investor B bought a put option. All else equal if the underlying share price volatility increases the value of Investor A's position will ________ and the value of Investor B's position will ________.

Which one of the following will increase the value of a put option?