30 Questions
Which one of the following is the correct definition of a call option?
A contract that grants the owner the right to buy an underlying asset at a specified price on or before a specified date
What is the strike price for the call option on Fincorp stock?
$27.50
What is the expiration date for the call option on Fincorp stock?
May 7th
What is the price of the call option per share?
$1.52
What is the price of Fincorp stock today?
$28.72
How many shares of Fincorp stock can be purchased with the call option?
100 shares
What is the total cost to buy the call option for 100 shares of Fincorp stock?
$152
Which of the following is true about the payoff and profit to a call option at expiration?
The vertical difference between the payoff line and the profit line is the cost of purchasing the option.
What is the slope of the lines that slope upwards in the payoff and profit diagram for a call option at expiration?
Positive
What is a 'naked option'?
An option that is not covered by owning the underlying asset.
What is the potential loss for an option writer?
Unlimited
What is the return in the $95 column for Strategy A (investing entirely in stock)?
-5%
Why is the payoff $0 to Strategy B (investing entirely in at-the-money call options) if the stock price remains at $100?
The options expire worthless if the stock price remains at the strike price.
Why are the upward slopes different for the various strategies in Figure 20.5?
The different strategies have different combinations of stock and options.
Which one of these is true about a put option?
The owner of a put option has the obligation to sell the underlying asset
What is the value of a call option at expiration?
The maximum of 0 and the difference between the stock price and the exercise price
What is the payoff to a call holder at expiration?
The difference between the stock price and the exercise price
What is the payoff to a call writer at expiration?
The maximum of 0 and the difference between the stock price and the exercise price
What is the payoff per share for a call option if the stock price goes up to $152 and the exercise price is $150?
$2
What is the profit for a call option if the stock price goes up to $152, the exercise price is $150, and the premium paid for the option is $4.10?
-$2.10
What is the holding period return for a call option if the stock price goes up to $152, the exercise price is $150, and the premium paid for the option is $4.10?
-51.22%
According to the text, which approach uses a cumulative normal distribution to describe the likely future price outcomes and assesses the probability those outcomes will be in the money or not?
Black Scholes Model
According to the text, which approach uses a lattice with fixed probabilities to describe the likely future price outcomes and assesses the probability those outcomes will be in the money or not?
Binomial Lattice Approach
According to the text, in both the Black Scholes Model and the Binomial Lattice Approach, what factors would lead to an increase in call option value?
Increasing time to expiration and increasing volatility
According to the text, in both the Black Scholes Model and the Binomial Lattice Approach, what factors would lead to a decrease in call option value?
Increasing exercise price and increasing volatility
According to the text, what is the value of a call option in the Black-Scholes option pricing formula?
c = S *N (d1) - X *e-rt *N(d2)
According to the text, what is the cumulative unit normal distribution function evaluated at d1 in the Black-Scholes option pricing formula?
The probability that a draw of a random variable that is normally distributed with mean zero and variance equal to one will be at or below d1
According to the text, what is the binomial lattice used for in option valuation?
To describe the likely future price outcomes and assess the probability those outcomes will be in the money or not
According to the text, what does an increase in stock price lead to in call option valuation?
Increase in call value
According to the text, what does higher volatility in outcomes lead to in option valuation?
Higher option value
Test your knowledge of payoff and profit to call options at expiration with this quiz. Determine the x-axis value where the dotted line intersects the horizontal axis, identify the slope of upward sloping lines, and understand the slope on the payoff diagram if you invested directly in the stock. Figure 20.3 Payoff and Profit to Call Wr...
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