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Unformatted text preview: BU423 Test Bank Dr. J. A. Schnabel Page 1 of 35 Explanation of numbering system: The first one or two digits before the period refer to the textbook chapter to which the question pertains. The digits after the period refer to the number of the Test Bank question pertaining to the designated chapter. Thus, 3.1 refers to the first question pertaining to Chapter 3. Although all quiz and final exam questions are multiple-choice in nature, the questions provided in this test bank are illustrative of the type of questions you will encounter. The sole difference is that you will be provided with five alternatives and you will be asked to choose the best alternative among the five. Note that the default assumption in this course is that interest rates and dividend yields are assumed to be quoted on a per annum and continuously compounded basis. Chapter 1: Introduction 1.1. A trader enters into a one-year short forward contract to sell an asset for $60 when the spot price is $58. The spot price in one year proves to be $63. What is the traders profit? Loss of $3 1.2. A trader buys 100 European call options with a strike price of $20 and a time to maturity of one year. Each option involves one unit of the underlying asset. The cost of each option or option premium is $2. The price of the underlying asset proves to be $25 in one year. What is the traders profit? Profit of $300 1.3. A trader sells 100 European put options with a strike price of $50 and a time to maturity of six months. Each option involves one unit of the underlying asset. The price received for each option is $4. The price of the underlying asset is $41 in six months. What is the traders profit? Loss of $500 1.4. The price of a stock is $36 and the price of a 3-month call option on the stock with a strike price of $36 is $3.60. Suppose a trader has $3,600 to invest and is trying to choose between buying 1,000 options and 100 shares of stock. How high does the stock price have to rise for an investment in options to be as profitable as an investment in the stock? $40 Note that we are trying to solve the following equation for P, the stock price: (P-36)100 = (P-36)1000 -3,600 1.5. A one year call option on a stock with a strike price of $30 costs $3. A one year put option on the stock with a strike price of $30 costs $4. A trader buys two call options and one put option. BU423 Test Bank Dr. J. A. Schnabel Page 2 of 35 A.) What is the breakeven stock price, above which the trader makes a profit? B.) What is the breakeven stock price below which the trader makes a profit? A.) $35 since 2=10/x where x is the amount by which the breakeven price exceeds $30, the strike price. Note that x = 30 + x....
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- Spring '12