EF4320 Homework 03 Ans - EF4320 Homework 03 Homework 3...

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EF4320 Homework 03 1. The intrinsic value of an in-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. none of the above. The intrinsic value of an in-the-money put option contract is the strike price less the stock price, since the holder can buy the stock at the market price and sell it for the strike. Difficulty: Moderate 2. You purchase one IBM 70 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is A. $98 B. $64 C. $76 D. $70 E. none of the above +70 + $6 = $76. Difficulty: Easy 3. A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock. Writing a covered call is a very safe strategy, as the writer owns the underlying stock. The only risk to the writer is that the stock will be called away, thus limiting the upside potential. Difficulty: Moderate 4. According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to: A. the call value plus the present value of the exercise price plus the stock price. B. the call value plus the present value of the exercise price minus the stock price. C. the present value of the stock price minus the exercise price minus the call price. D. the present value of the stock price plus the exercise price minus the call price. E. none of the above. P = C - SO + PV(X) + PV(dividends), where SO = the market price of the stock, and X = the exercise price. Difficulty: Difficult
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5. A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. none of the above. If you invest in a stock and purchase a put option on the stock you are guaranteed a payoff equal to the exercise price; thus the protection of the put. Difficulty: Moderate 6. You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a vertical spread. D. a short straddle. E. none of the above. A vertical or money spread involves the purchase one option and the simultaneous sale of another with a different exercise price and same expiration date. Difficulty: Moderate
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This note was uploaded on 11/12/2010 for the course EF 4320 taught by Professor Ads during the Spring '10 term at Helsinki University of Technology.

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EF4320 Homework 03 Ans - EF4320 Homework 03 Homework 3...

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