Options at Expiration

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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 (correct)

A contract that grants the owner the obligation to buy an underlying asset at a specified price on or before a specified date

A contract that grants the owner the right to sell an underlying asset at a specified price on or before a specified date

A contract that grants the owner the obligation to sell 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?

$1.52

$27.50 (correct)

$0.24

$28.72

What is the expiration date for the call option on Fincorp stock?

June 7th

June 1st

May 7th (correct)

May 1st

What is the price of the call option per share?

$1.52 Signup and view all the answers

What is the price of Fincorp stock today?

$28.72 Signup and view all the answers

How many shares of Fincorp stock can be purchased with the call option?

100 shares Signup and view all the answers

What is the total cost to buy the call option for 100 shares of Fincorp stock?

$152 Signup and view all the answers

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. Signup and view all the answers

What is the slope of the lines that slope upwards in the payoff and profit diagram for a call option at expiration?

Positive Signup and view all the answers

What is a 'naked option'?

An option that is not covered by owning the underlying asset. Signup and view all the answers

What is the potential loss for an option writer?

Unlimited Signup and view all the answers

What is the return in the $95 column for Strategy A (investing entirely in stock)?

-5% Signup and view all the answers

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. Signup and view all the answers

Why are the upward slopes different for the various strategies in Figure 20.5?

The different strategies have different combinations of stock and options. Signup and view all the answers

Which one of these is true about a put option?

The owner of a put option has the obligation to sell the underlying asset Signup and view all the answers

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 Signup and view all the answers

What is the payoff to a call holder at expiration?

The difference between the stock price and the exercise price Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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% Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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) Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

According to the text, what does an increase in stock price lead to in call option valuation?

Increase in call value Signup and view all the answers

According to the text, what does higher volatility in outcomes lead to in option valuation?

Higher option value Signup and view all the answers