Suppose that you sell CDT short at $23 and at the same time you write a call opt
ID: 2709589 • Letter: S
Question
Suppose that you sell CDT short at $23 and at the same time you write a call option on CDT with a strike price of $15 and a premium of $2. What is the combined profit or loss on the two positions together if just prior to expiration of the call option the price of CDT is $21? Assume that you cover your short position (meaning you get rid of the short position) just prior to the time of option expiration.
($1)
$1
($2)
$0
$2
Which of the following statements about “moneyness” of call and put options is FALSE?
Put options are out-of-the-money when strike price < the underlying stock price.
Option writers (also called sellers) must make payments to option buyers whenever the buyer exercises in-the-money options.
Call options are in-the-money when strike price > the underlying stock price.
Put options are at-the-money when strike price = the underlying stock price.
An option buyer would be advised to exercise any call or put option that is in-themoney and about to expire.
Holding all else the same, the premium of a call option on common stock would decrease if: I. The price of the underlying stock increases. II. The volatility of the underlying stock increases. III. The time to expiration decreases.
I and II only
III only
I, II, and III
I only
I and III only
You buy a straddle on SD whose exercise price on the call and the put is $20. The premium on the call option is $0.15, and the premium on the put option is $11.00. Calculate the straddle’s profit or loss if just prior to expiration SD’s stock price is $10 per share.
$11.15
($1.15)
$11.00
($11.15)
$1.15
Which of the following comes closest to the internal rate of return (IRR) of a project that requires an initial investment of $100 and produces TWO cash inflows: $100 at the end of year 3 and $160 at the end of year 10? The required rate of return for the project is 12%.
15.75%
4.81%
12.00%
6.05%
16.07%
You buy a call option on a stock for a premium of $1.00. The exercise price is $31.50. What is the option’s profit or loss if just prior to expiration the stock price is $32.50?
$0
$1.00
($0.50)
($1.00)
$0.50
You write a put on Kane with an exercise price of $3.50 and a premium of $1.00. At the same time you buy a call on Kane with an exercise price also at $3.50 and a premium of $1.25. Calculate the profit or loss on both positions simultaneously if just prior to option expiration Kane’s stock price is $3.00.
($0.75)
($0.50)
$0.00
($1.75)
($1.25)
Which of the following comes closest to the profitability index (PI) of a project that requires an initial investment of $100 and produces a single cash flow of $160 at the end of year 10 if the required rate of return is 12%?
0.47
0.43
0.56
0.62
0.52
Which of the following values comes closest to the net present value of a project that requires an initial investment of $250 and produces cash flows of $60 per year for 10 consecutive years beginning at the end of year 5 (the cash flows go from the end of year 5 through the end of year 14)? The required rate of return is 12%?
($64.70)
$1.81
($17.23)
($50.32)
($34.55)
a.($1)
b.$1
c.($2)
d.$0
e.$2
Explanation / Answer
Suppose that you sell CDT short at $23 and at the same time you write a call option on CDT with a strike price of $15 and a premium of $2. What is the combined profit or loss on the two positions together if just prior to expiration of the call option the price of CDT is $21? Assume that you cover your short position (meaning you get rid of the short position) just prior to the time of option expiration.
Combined profit or loss on the two positions = (21-15) - (23-21) -2
combined profit or loss on the two positions = $ 2
Answer
$ 2
Which of the following statements about “moneyness” of call and put options is FALSE?
c) Call options are in-the-money when strike price > the underlying stock price.
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