Question

4. An investor purchases 100 shares of xyz stock at 67 and 1/2 and writes an at-the-money call for a total premium of $3 75. Margin requirements are at 50%. What is the net cash deposit that is required in his margin account?

a.         3,000

b.         2,000

c.         2?187.50

d.         3,375

e.         none of the above

5. The maximum gain on a long put occurs when the stock price at expiration is

a.         infinite

b.         equal to the exercise price

c.         zero

d.         none of the above

6. Consider a portfolio consisting of a long call with an exercise price of E, a short position on a non­dividend paying stock at an initial price of Sand the purchase of riskless bonds with a face value of E and maturing when the call expires. What should such a portfolio be worth?

a.         C + P - E(l+r)"1

b.         C • S

c.         P

d.         P + S - E(l+r)"1

e.         none of the above

Answer 1

ANS 4

Investment in shares = 100 * 67.5 = 6750

Margin Requirement = 50% * 6750 = 3375

Option Premium Recieved = 375

Net Cash Deposit = Margin Required - Optin Premium Received

= 3375 - 375 = 3000

ANS (a) 3000

ANS 5

Put is the right to sell a stock at the specified price. Since, the selling price is predetermined in the contract the maximum profit would be when stock price in minimum i.e. zero.

ANS (c) Zero

ANS 6

The Put-Call Parity equation is as follows:

C + PV(x) = P + S .... Eq(1)

where, C = Call Premium

PV(x) = Present Value of Call Exercise Price

P = Put Premium

S = Current Market Value of Underlying invested in Risk Free Securities

The Portfolio is worth = [ C + PV(x) ] + S

Substituting From Eq 1 we get

= [ P + S ] + S = P + 2S

ANS (e) None of the above