Question

- Consider a put option and a call option with the same strike
price and time to maturity. Which of the following is true? (5
points)
- It is possible for both options to be in the money.
- It is possible for both options to be out of the money.
- One of the options must be in the money.
- One of the options must be either in the money or at the money.

- When the stock price increases with all else remaining the
same, which of the following is true? (5 points)
- Both calls and puts increase in value.
- Both calls and puts decrease in value.
- Calls increase in value while puts decrease in value.
- Puts increase in value while calls decrease in value.

- Which of the following describes a protective put? (5 points)
- A long put option on a stock plus a long position in the stock.
- A long put option on a stock plus a short position in the stock.
- A short put option on a stock plus a short call option on the stock.
- A short put option on a stock plus a long position in the stock.

- Which of the following describes a covered call? (5 points)
- A long call option on a stock plus a long position in the stock.
- A long call option on a stock plus a short put option on the stock.
- A short call option on a stock plus a short position in the stock.
- A short call option on a stock plus a long position in the stock.

Answer #1

Part 1. As there are 2 Options with the same strike price (SP) and stock price can be either higher than SP/ lower than SP/ equal to SP then in that case (Call is in the money/ Put is in the money/ Both options are at the money)

Therefore as above Only one option can be In the Money or At the Money at the same time. Therefore option D is correct.

Part2. When Stock Price increases then Call Option rise in value and Put option drops in Value. Hence Option C is correct.

Part3. Protective Put entails buying stock while hedging the downside risk by buying Put Option. Therfore Option A is the correct answer.

Part 4. Covered Call entails buying Stock and selling Out of the money Calls, thereby to reduce the purchase price and generate extra income while owning stock. Therfore Option D is correct.

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For a European call option and a European put option on the same
stock, with the same strike price and time to maturity, which of
the following is true?
A) When the call option is in-the-money and the put option is
out-of-the-money, the stock price must be lower than the strike
price.
B) The buyer of the call option receives the same premium as the
writer of the put option.
C) Since both the call and the put are risky...

For a European call option and a European put option on the same
stock, with the same strike price and time to maturity, which of
the following is true?
A) Before expiration, only in-the-money options can have
positive time premium.
B) If you have a portfolio of protected put, you can replicate
that portfolio by long a call and hold certain amount of risk-free
bond.
C) Since both the call and the put are risky assets, the
risk-free interest rate...

Assume that the stock price is $56, call option price is $9, the
put option price is $5, risk-free rate is 5%, the maturity of both
options is 1 year , and the strike price of both options is 58. An
investor can __the put option, ___the call option, ___the stock,
and ______ to explore the arbitrage opportunity.
sell, buy, short-sell, lend
buy, sell, buy, lend
sell, buy, short-sell, borrow
buy, sell, buy, borrow

If the volatility of the underlying asset increases, then
the:
Value of the put option will increase, but the value of the call
option will decrease.
Value of the put option will decrease, but the value of the call
option will increase.
Value of both the put and call options will increase.
Value of both the put and call options will decrease.
Value of both the put and call options will remain the same.

1.
American put option price increase if time to expiration gets
extended.
True
or
False
2. American put option price will increase if risk free rate
decrease.
True
or
False
3. American put option price increase if volatility of
underlying stock price goes down.
True
or
False
4. For a non dividend paying underlying stocks, american call
options can be more expensive than european call options that are
equal in other terms.
True
or
False

Which of the following is the riskiest single-option
position?
(a) long the call.
(b) long the put.
(c) short the call.
(d) short the put.
(v) An investor will make a net profit from a call option when
the price of the stock is:
(a) above the strike price.
(b) below the strike price plus the premium.
(c) above the strike price plus the premium.
(d) at the strike.

Consider a call option on a stock, the stock price is $29, the
strike price is $30, the continuously risk-free interest rate is 5%
per annum, the volatility is 20% per annum and the time to maturity
is 0.25.
(i) What is the price of the option? (6 points)
(ii) What is the price of the option if it is a put? (6
points)
(iii) What is the price of the call option if a dividend of $2
is expected...

The strike price for a European call and put option is $56 and
the expiration date for the call and the put is in 9 months. Assume
the call sells for $6, while the put sells for $7. The price of the
stock underlying the call and the put is $55 and the risk free rate
is 3% per annum based on continuous compounding. Identify any
arbitrage opportunity and explain what the trader should do to
capitalize on that opportunity....

Consider a European call option and a European put option, both
of which have a strike price of $70, and expire in 4 years. The
current price of the stock is $60. If the call option currently
sells for $0.15 more than the put option, the continuously
compounded interest rate is
3.9%
4.9%
5.9%
2.9%

Option and Strike Price
Price of the Option
Price of the Stock
Calls: LMN, Inc., 60
$11.00
$68
LMN, Inc., 70
$1.50
$68
Puts: LMN, Inc., 60
$1.00
$68
LMN, Inc., 70
$4.50
$68
1) Calculate the Intrinsic Value of each call option.
2) Calculate the Time Value of each call option.
3) Calculate the Intrinsic Value of each put option.
4) Calculate the Time Value of each put option.

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