Show Question 102 option, hedging A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct? (i) buy call options on live cattle. (ii) buy put options on live cattle. (iii) sell call options on live cattle. Select the most correct response: Question 103 option Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered. (a) 1: short call, 2: long call, 3: short put, 4: long put. (b) 1: long call, 2: long put, 3: short call, 4: short put. (c) 1: short put, 2: long put, 3: short call, 4: long call. (d) 1: long put, 2: short put, 3: long call, 4: short call. (e) 1: long put, 2: short call, 3: short put, 4: long call. Question 122 option You have just sold an 'in the money' 6 month European put option on the mining company BHP at an exercise price of $40 for a premium of $3. Which of the following statements best describes your situation? Question 123 option Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered (a) 1: short call, 2: long call, 3: short put, 4: long put. (b) 1: long call, 2: long put, 3: short call, 4: short put. (c) 1: short put, 2: long put, 3: short call, 4: long call. (d) 1: long put, 2: short put, 3: long call, 4: short call. (e) 1: short call, 2: long put, 3: long call, 4: short put. Question 124 option, hedging You operate a cattle farm that supplies hamburger meat to the big fast food chains. You buy a lot of grain to feed your cattle, and you sell the fully grown cattle on the livestock market. You're afraid of adverse movements in grain and livestock prices. What options should you buy to hedge your exposures in the grain and cattle livestock markets? Select the most correct response: Question 125 option, speculation, market efficiency Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year. Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year. What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)? Assume that:
Question 271 CAPM, option, risk, systematic risk, systematic and idiosyncratic risk All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease. What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer. Call and put option prices increase when the: Question 304 option Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation? Question 305 option, short selling, speculation You believe that the price of a share will fall significantly very soon, but the rest of the market does not. The market thinks that the share price will remain the same. Assuming that your prediction will soon be true, which of the following trades is a bad idea? In other words, which trade will NOT make money or prevent losses? Question 334 option Which option position has the possibility of unlimited potential losses? Question 385 Merton model of corporate debt, real option, option A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities: ##V## = Market value of assets. ##E## = Market value of (levered) equity. ##D## = Market value of zero coupon bonds. ##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year. The levered equity graph above contains bold labels a to e. Which of the following statements about those labels is NOT correct? Question 386 Merton model of corporate debt, real option, option A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities: ##V## = Market value of assets. ##E## = Market value of (levered) equity. ##D## = Market value of zero coupon bonds. ##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year. The risky corporate debt graph above contains bold labels a to e. Which of the following statements about those labels is NOT correct? Question 387 real option, option One of the reasons why firms may not begin projects with relatively small positive net present values (NPV's) is because they wish to maximise the value of their: Question 388 real option, option A moped is a bicycle with pedals and a little motor that can be switched on to assist the rider. Mopeds are useful for quick transport using the motor, and for physical exercise when using the pedals unassisted. This offers the rider: Question 389 real option, option You're thinking of starting a new cafe business, but you're not sure if it will be profitable. You have to decide what type of cups, mugs and glasses you wish to buy. You can pay to have your cafe's name printed on them, or just buy the plain un-marked ones. For marketing reasons it's better to have the cafe name printed. But the plain un-marked cups, mugs and glasses maximise your: Question 390 real option, option Some financially minded people insist on a prenuptial agreement before committing to marry their partner. This agreement states how the couple's assets should be divided in case they divorce. Prenuptial agreements are designed to give the richer partner more of the couples' assets if they divorce, thus maximising the richer partner's: Question 395 real option, option The cheapest mobile phones available tend to be those that are 'locked' into a cell phone operator's network. Locked phones can not be used with other cell phone operators' networks. Locked mobile phones are cheaper than unlocked phones because the locked-in network operator helps create a monopoly by: Question 396 real option, option Your firm's research scientists can begin an exciting new project at a cost of $10m now, after which there’s a:
The firm's cost of capital is 10% pa. What's the present value (at t=0) of the option to expand in year 5? Question 399 option, no explanation A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars. What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the call option? Question 400 option, no explanation A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars. What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option? Question 430 option, no explanation A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars. What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the call option? Question 431 option, no explanation A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars. What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the put option? Question 432 option, option intrinsic value, no explanation An American style call option with a strike price of ##K## dollars will mature in ##T## years. The underlying asset has a price of ##S## dollars. What is an expression for the current intrinsic value in dollars from owning (being long) the American style call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option. Question 433 Merton model of corporate debt, real option, option, no explanation A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities: ##V## = Market value of assets. ##E## = Market value of (levered) equity. ##D## = Market value of zero coupon bonds. ##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year. What is the payoff to equity holders at maturity, assuming that they keep their shares until maturity? Question 434 Merton model of corporate debt, real option, option A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities: ##V## = Market value of assets. ##E## = Market value of (levered) equity. ##D## = Market value of zero coupon bonds. ##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year. What is the payoff to debt holders at maturity, assuming that they keep their debt until maturity? Question 585 option A man just sold a call option to his counterparty, a lady. The man has just now: Question 586 option Which one of the following statements about option contracts is NOT correct? Question 587 option Which of the following statements about option contracts is NOT correct? For every: Question 588 option If trader A has sold the right that allows counterparty B to buy the underlying asset from him at maturity if counterparty B wants then trader A is: Question 591 short selling, future, option After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall. Which of the following strategies is NOT a good idea, assuming that your prediction is true? Question 636 option, option payoff at maturity, no explanation Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##. (a) ##f_{LC,T}=max(S_T-X_T,0)## (b) ##f_{LC,T}=max(X_T-S_T,0)## (c) ##f_{LC,T}=-max(S_T-X_T,0)## (d) ##f_{LC,T}=-max(X_T-S_T,0)## (e) ##f_{LC,T}=min(X_T-S_T,0)## Question 637 option, option payoff at maturity, no explanation Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##. (a) ##f_{SC,T}=max(S_T-X_T,0)## (b) ##f_{SC,T}=max(X_T-S_T,0)## (c) ##f_{SC,T}=-max(S_T-X_T,0)## (d) ##f_{SC,T}=-max(X_T-S_T,0)## (e) ##f_{SC,T}=min(X_T-S_T,0)## Question 638 option, option payoff at maturity, no explanation Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##. (a) ##f_{LP,T}=max(S_T-X_T,0)## (b) ##f_{LP,T}=max(X_T-S_T,0)## (c) ##f_{LP,T}=-max(S_T-X_T,0)## (d) ##f_{LP,T}=-max(X_T-S_T,0)## (e) ##f_{LP,T}=min(X_T-S_T,0)## Question 639 option, option payoff at maturity, no explanation Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##. (a) ##f_{SP,T}=max(S_T-X_T,0)## (b) ##f_{SP,T}=max(X_T-S_T,0)## (c) ##f_{SP,T}=-max(S_T-X_T,0)## (d) ##f_{SP,T}=-max(X_T-S_T,0)## (e) ##f_{SP,T}=min(X_T-S_T,0)## Question 645 option, no explanation A trader buys one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the: Question 675 option, option profit, no explanation Which of the below formulas gives the profit ##(\pi)## from being long a call option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LC,0}##. Note that ##S_T##, ##X_T## and ##f_{LC,0}## are all positive numbers. (a) ##\pi_{LC}=max(S_T-X_T,0) + f_{LC,0}## (b) ##\pi_{LC}=max(X_T-S_T,0) + f_{LC,0}## (c) ##\pi_{LC}=-max(S_T-X_T,0) + f_{LC,0}## (d) ##\pi_{LC}=max(X_T-S_T,0) - f_{LC,0}## (e) ##\pi_{LC}=max(S_T-X_T,0) - f_{LC,0}## Question 676 option, option profit, no explanation Which of the below formulas gives the profit ##(\pi)## from being short a call option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LC,0}##. Note that ##S_T##, ##X_T## and ##f_{LC,0}## are all positive numbers. (a) ##\pi_{SC}=max(S_T-X_T,0) + f_{LC,0}## (b) ##\pi_{SC}=-max(S_T-X_T,0) + f_{LC,0}## (c) ##\pi_{SC}=max(X_T-S_T,0) + f_{LC,0}## (d) ##\pi_{SC}=-max(S_T-X_T,0) - f_{LC,0}## (e) ##\pi_{SC}=-max(X_T-S_T,0) - f_{LC,0}## Question 677 option, option profit, no explanation Which of the below formulas gives the profit ##(\pi)## from being long a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers. (a) ##\pi_{LP}=-max(S_T-X_T,0) - f_{LP,0}## (b) ##\pi_{LP}=-max(X_T-S_T,0) + f_{LP,0}## (c) ##\pi_{LP}=max(S_T-X_T,0) - f_{LP,0}## (d) ##\pi_{LP}=max(X_T-S_T,0) + f_{LP,0}## (e) ##\pi_{LP}=max(X_T-S_T,0) - f_{LP,0}## Question 678 option, option profit, no explanation Which of the below formulas gives the profit ##(\pi)## from being short a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers. (a) ##\pi_{SP}=-max(S_T-X_T,0) - f_{LP,0}## (b) ##\pi_{SP}=-max(X_T-S_T,0) + f_{LP,0}## (c) ##\pi_{SP}=max(S_T-X_T,0) - f_{LP,0}## (d) ##\pi_{SP}=max(X_T-S_T,0) + f_{LP,0}## (e) ##\pi_{SP}=max(X_T-S_T,0) - f_{LP,0}## Question 679 option, no explanation A trader sells one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the: Question 680 option, no explanation A trader buys one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the: Question 690 option A trader just bought a European style put option on CBA stock. The current option premium is $2, the exercise price is $75, the option matures in one year and the spot CBA stock price is $74. Which of the following statements is NOT correct? Question 793 option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.
Which of the following statements is NOT correct? Question 820 option, future, no explanation What derivative position are you exposed to if you have the obligation to sell the underlying asset at maturity, so you will definitely be forced to sell the underlying asset? Question 821 option, option profit, option payoff at maturity, no explanation You just paid $4 for a 3 month European style call option on a stock currently priced at $47 with a strike price of $50. The stock’s next dividend will be $1 in 4 months’ time. Note that the dividend is paid after the option matures. Which of the below statements is NOT correct? Question 824 option, no explanation A put option written on a risky non-dividend paying stock will mature in one month. As is normal, assume that the option's exercise price is non-zero and positive ##(K>0)## and the stock has limited liability ##(S>0)##. Which of the following statements is NOT correct? The put option's: Question 829 option, future, delta, gamma, theta, no explanation Below are some statements about futures and European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is NOT correct? All other things remaining equal: Question 830 option, delta, gamma, no explanation Below are some statements about European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is NOT correct? Question 832 option, Black-Scholes-Merton option pricing A 12 month European-style call option with a strike price of $11 is written on a dividend paying stock currently trading at $10. The dividend is paid annually and the next dividend is expected to be $0.40, paid in 9 months. The risk-free interest rate is 5% pa continuously compounded and the standard deviation of the stock’s continuously compounded returns is 30 percentage points pa. The stock's continuously compounded returns are normally distributed. Using the Black-Scholes-Merton option valuation model, determine which of the following statements is NOT correct. Question 834 option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
Question 838 option, put call parity A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##. Being long the call and short the stock is equivalent to being: Question 839 option, put call parity A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##. You are currently long the stock. You want to hedge your long stock position without actually trading the stock. How would you do this? Question 863 option, binomial option pricing A one year European-style call option has a strike price of $4. The option's underlying stock pays no dividends and currently trades at $5. The risk-free interest rate is 10% pa continuously compounded. Use a single step binomial tree to calculate the option price, assuming that the price could rise to $8 ##(u = 1.6)## or fall to $3.125 ##(d = 1/1.6)## in one year. The call option price now is: Question 864 option, binomial option pricing A one year European-style put option has a strike price of $4. The option's underlying stock pays no dividends and currently trades at $5. The risk-free interest rate is 10% pa continuously compounded. Use a single step binomial tree to calculate the option price, assuming that the price could rise to $8 ##(u = 1.6)## or fall to $3.125 ##(d = 1/1.6)## in one year. The put option price now is: Question 865 option, Black-Scholes-Merton option pricing A one year European-style call option has a strike price of $4. The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa. The risk-free interest rate is 10% pa continuously compounded. Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: Question 866 option, Black-Scholes-Merton option pricing A one year European-style put option has a strike price of $4. The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa. The risk-free interest rate is 10% pa continuously compounded. Use the Black-Scholes-Merton formula to calculate the option price. The put option price now is: Question 903 option, Black-Scholes-Merton option pricing, option on stock index A six month European-style call option on the S&P500 stock index has a strike price of 2800 points. The underlying S&P500 stock index currently trades at 2700 points, has a continuously compounded dividend yield of 2% pa and a standard deviation of continuously compounded returns of 25% pa. The risk-free interest rate is 5% pa continuously compounded. Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: Question 904 option, Black-Scholes-Merton option pricing, option on future on stock index A six month European-style call option on six month S&P500 index futures has a strike price of 2800 points. The six month futures price on the S&P500 index is currently at 2740.805274 points. The futures underlie the call option. The S&P500 stock index currently trades at 2700 points. The stock index underlies the futures. The stock index's standard deviation of continuously compounded returns is 25% pa. The risk-free interest rate is 5% pa continuously compounded. Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: Question 947 arbitrage table, option, no explanation A non-dividend paying stock has a current price of $20. The risk free rate is 5% pa given as a continuously compounded rate. Options on the stock are currently priced at $5 for calls and $5.55 for puts where both options have a 2 year maturity and an exercise price of $24. You suspect that the call option contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct? Question 956 option, Black-Scholes-Merton option pricing, delta hedging, hedging A bank sells a European call option on a non-dividend paying stock and delta hedges on a daily basis. Below is the result of their hedging, with columns representing consecutive days. Assume that there are 365 days per year and interest is paid daily in arrears.
In the last column when there are 55 days left to maturity there are missing values. Which of the following statements about those missing values is NOT correct? Which statement is true about options contracts?Which statements are TRUE about option contracts? The best answer is A. An "out the money" contract is one, that if exercised, would result in an unprofitable stock trade to the holder. These contracts are left to expire unexercised.
When you exercise a call option what happens?When you convert a call option into stock by exercising, you now own the shares. You must use cash that will no longer be earning interest to fund the transaction, or borrow cash from your broker and pay interest on the margin loan. In both cases, you are losing money with no offsetting gain.
Are options automatically exercised?Stock options that are in-the-money at the time of expiration will be automatically exercised. For puts, your options are considered in-the-money if the stock price is trading below the strike price. Conversely, call options are considered in-the-money when the stock price is trading above the strike price.
Can you partially exercise an option?Option exercise or assignment can be partial: one can exercise less than all the options held. Conversely, you may be assigned on less than all your short calls or puts. However, one cannot exercise or be assigned on part of a single option contract.
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