FIU FIN4486 Homework 4 Chapters 9 and 10

Suppose that a September call option with a strike price of $70 costs $14.0. Under what circumstances will the seller (or writer) of the option earn a profit? Let S equal the price of the underlying.

Selected Answer:

Answers:

a. S > 84.0

b. S < 84.0

c. S < 56.0

d. S < 70

Question 2

8 out of 8 points

Correct

Suppose that a September put option with a strike price of $100 costs $10.0. Under what circumstances will the holder of the option earn a profit? Let S equal the price of the underlying.

Selected Answer:

Answers:

a. S < 100

b. S > 110.0

c. S > 100

d.S < 90.0

Question 3

7 out of 7 points

Correct

Suppose that a September put option with a strike price of $100 costs $14.5. Under what circumstances will the seller (or writer) of the option earn a profit? Let S equal the price of the underlying.

Selected Answer:

Answers:

a. S > 100

b. S < 100

c. S < 114.5

S > 85.5

Question 4

8 out of 8 points

Correct

A put option on 100 shares of Generous Dynamics stock has an exercise price $115.0 per share. GD declares 4.0-for-1 stock split. What happens to the exercise price and the number of shares underlying the option?

Selected Answer:

Answers:

a. Number of shares is reduced to 25.0 and the exercise price is increase to 460.0

b. Nothing happens

c. Number of shares increases to 400.0 and the exercise price is reduced to 28.75

d. Number of shares increases to 400.0 and the exercise price remains the same.

Question 5

0 out of 7 points

Incorrect

A call option on 100 shares of Generous Dynamics stock has an exercise price $125.0 per share. GD declares a stock dividend of 18.0 percent. What happens to the exercise price and the number of shares underlying the option?

Selected Answer:

Answers:

a. Nothing happens

b. Number of shares increases to 118.0 and the exercise price remains the same.

c. Number of shares increases to 118.0 and the exercise price is reduced to 105.93

d. Number of shares increases to 118.0 and the exercise price is reduced to 102.5

Question 6

8 out of 8 points

Correct

What choice correctly completes the Table shown below:

Summary of Effect on the Price of a American Call Option of Increasing One Variable

Stock Price Strike Maturity Volatility Risk-free rate Dividend

+ ? ? ? ? ?

Selected Answer:

Answers:

a. -, +, +, -, -

b. -, +, +, -, +

c. -, +, ?, -, +

d. -, +, +, +, -

Question 7

8 out of 8 points

Correct

What choice correctly completes the Table shown below:

Summary of Effect on the Price of a American Put Option of Increasing One Variable

Stock Price Strike Maturity Volatility Risk-free rate Dividend

- ? ? ? ? ?

Selected Answer:

Answers:

a. +, +, +, -, +

b. +, ?, +, -, +

c. +, +, +, +, +

d. +, +, +, -, -

Question 8

8 out of 8 points

Correct

A European put option on ENRON stock has a strike price $55.0 and matures in 9.0 months. The continuously compounded risk-free rate is 7.0 percent per year. If the price of ENRON stock goes to zero, what is the value of the put option?

Selected Answer:

d. 52.187

Answers:

a. 50.305

b. 55.0

c. 57.965

d. 52.187

Question 9

8 out of 8 points

Correct

An American put option on ENRON stock has a strike price $52.5 and matures in 9.0 months. The continuously compounded risk-free rate is 5.25 percent per year. If the price of ENRON stock goes to zero, what is the value of the put option?

Selected Answer:

Answers:

a. 52.5

b. 54.608

c. 50.473

d. 49.065

Question 10

7 out of 7 points

Correct

Consider a European put option with a strike price of $143.0 and maturity of 6.0 months. The underlying stock price equals 123. The continuously compounded risk-free rate is 7.0 percent per year. What is the lower and upper bound, respectively, on the option value?

Selected Answer:

Answers:

a. 20.0, 143.0

b. 15.082, 143.0

c. 20.0, 138.08

d. 15.082, 138.08

Question 11

0 out of 8 points

Incorrect

Suppose that a American put option with a strike price of $97.5 and maturity of 7.0 months costs $12.3. The underlying stock price equals 85. The continuously compounded risk-free rate is 6.5 percent per year. What is the potential arbitrage profit from buying a put option on one share of stock?

Selected Answer:

Answers:

a. 3.4277

b. 0.2

c. 6.4295

d. 3.9679

Question 12

8 out of 8 points

Correct

Consider a European call option with a strike price of $128.0 and maturity of 9.0 months. The underlying stock price equals 133. The continuously compounded risk-free rate is 9.25 percent per year. What is the lower bound on the option value?

Selected Answer:

Answers:

a. 12.875

b. 4.0

c. 13.579

d. 5.0

Question 13

0 out of 7 points

Incorrect

A European call option with a strike price of $99.0 and maturity of 6.0 months costs $25.216.The underlying stock price is $119.0. The continuously compounded risk-free rate is 9.0 percent per year. What is the value of a European put option with strike price of $99.0 and maturity of 6.0 months?

Selected Answer:

c. 4.9195

Answers:

a. 1.2723

b. 0.86012

c. 4.9195

d. 5.2164

Saturday, April 19, 2014 12:28:45 AM EDT