16. During lecture, we discussed how riskier option strategies are likely to hav
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Question
16. During lecture, we discussed how riskier option strategies are likely to have higher capital requirements in your brokerage account (e.g. initial margin, maintenance margin, account size). Consider the following 5 strategies and assume X=S with identical expiration dates!
Writing a Covered Call
Writing an Uncovered Call
Purchasing an Uncovered Call
Buying a Protective Put
Selling a Put
Which option strategy would have the lowest capital requirement and which would have the highest capital requirement?
A. Lowest: Buying a Protective Put Highest: Writing a Covered Call
B. Lowest: Writing a Covered Call Highest: Selling a Put
C. Lowest: Writing a Covered Call Highest: Writing an Uncovered Call
D. Lowest: Purchasing an Uncovered Call Highest: Selling a Put
E. Lowest: Buying a Protective Put Highest: Writing an Uncovered Call
17. During lecture, we discussed if and how Quarter on Quarter Changes in S&P 500 Sales and in US GDP Data should be used when trying to determine whether the US is technically in a recession. How many of the 10 quarters listed below would the US be declared to be in a recession?
A. 2
B. 3
C. 4
D. 5
E. 9
18. During lecture, we displayed a time series graph of leading, concurrent, and lagging indicators. Going into a recession, the time series showed the leading indicators plotted below the lagging indicators while the lagging indicators plotted below the concurrent indicators. Coming out of a recession, which two indictors would we expect to cross last?
A. The lagging indicator would intersect the concurrent indicator.
B. The concurrent indicator would intersect the leading indicator.
C. The lagging indicator would intersect the leading indicator.
D. The indicators would likely cross at the same time.
E. The indicators would likely never cross again until the next recession.
19. Using the Put-Call Parity and your knowledge of Call & Put payoffs and pricing, which of the following combinations of C, X, S, & P values are rational with no possible arbitrage opportunities? Assume a 0.0% interest rate and European Option payoffs at expiration.
A. I
B. I & II
C. I & III
D. II & IV
E. I, II, III, IV
For Questions 20-23, use the following information:
During lecture, we discussed how the Brexit announcement caused an unexpectedly large drop in the
S&P 500 (with SP500 futures down as much as 5.0%) pre-market. Then we made some assumptions:
Options on the index trade just like options on a stock (NOTE: this is not exactly true in real life)
On the day before Brexit, the SP500 traded around 2060
On the day before Brexit, you bought a call with a strike price of 2080 at a cost of 8
The day before Brexit, you bought a put with a strike price of 1980 at a cost of 2
On the day of Brexit, the SP500 closed at 1967 after a day of volatile trading
On the day of Brexit, you exercised both of your American Options
20. The payoff of your call is ______ while the payoff of your put is______?
A. Call: -8 Put: -2
B. Call: 8 Put: 2
C. Call: 0 Put: 13
D. Call: 13 Put: 0
E. None of the Above
21. What is the most suitable name for your option strategy?
A. Long Straddle
B. Short Straddle
C. Long Spread
D. Short Spread
E. None of the Above
22. What is your option strategy’s profit (i.e. profit from call + profit from put)?
A. -10
B. 3
C. 5
D. 11
E. 13
23. When you go to exercise your American Options, you are surprised that your option strategy is worth even more than indicated by your payoff and profit diagrams. The largest contributor toward this increase in value was most likely the:
A. Increased strength in the USD due to a flight to quality
B. Increase in the options’ delta
C. Increase in the VIX
D. Increased time to expiration
E. Increased dividend yield of the S&P 500
24. You want to replicate a short put position synthetically by using the Put-Call Parity. To do so:
A. Sell the Stock Buy the Rf Bond Sell the Call
B. Sell the Stock Sell the Rf Bond Buy the Call
C. Sell the Stock Buy the Rf Bond Buy the Call
D. Buy the Stock Buy the Rf Bond Sell the Call
E. Buy the Stock Sell the Rf Bond Sell the Call
25. It is important to think about your reader when creating graphs in Excel.
Sometimes you can read a graph great in color, but it is hard to read in black and white.
Legends with a secondary axis should also denote which line relates to which axis (i.e. Left vs. Right).
In the example below, VMC/Industry/SP500 Gross Margins (GM) are on the left axis.
In 2005, SP500 had the highest GM and the Industry had the lowest GM.
VMC’s Operating Margin is on the right axis and is the line that is selected.
As addressed in the Spreadsheet Problem Set #2, this graph makes interpretation of relationships difficult. Don’t let this happen to you on the PPT #2 Assignment. Below are some conclusions you could make from this graph; which of the following conclusions are illogical?
I. VMC’s Operating Margins should never be greater the VMC’s Gross Margins
II. VMC’s Operating Margins should never be lower than 0.0% like in 2010-2011
III. VMC’s Operating Margin can be greater than the SP500’s Gross Margin like it was in 2006-2007
IV. VMC’s Beta is likely higher than the Industry’s Beta
A. I
B. III
C. I & III
D. I, III, & IV
E. None of the Above
26. Using the information below, solve for your leveraged holding period return:
You long 500 shares of Stock Z currently selling at $150.00 per share
You post a 45% initial margin
You are charged 8.0% interest on the loan per year
In 1 year, the shares trade at $175.00 per share
You earn no interest on the funds in your margin account and the firm does not pay any dividends
A. 16.67%
B. 12.27%
C. 8.67%
D. 4.27%
E. 12.67%
27. Using the information below, solve for the price at which you will get a margin call:
You sell short 200 shares of Company Z that are currently selling at $25 per share
You post the 50% initial margin required on the short sale.
Your broker requires a 30% maintenance margin
You earn no interest on the funds in your margin account and the firm does not pay any dividends
A. $28.85
B. $35.71
C. $31.50
D. $32.25
E. None of the Above
Explanation / Answer
Question 16.
Correct answer is option E. Lowest: Buying a Protective Put
Highest: Writing an Uncovered Call
Explanation:
Writing a Covered Call: Capital requirement = Price of the stock – premium eared from writing a call option. Margin requirement will be medium
Writing an Uncovered Call: Capital Requirement = 0 and premium eared from writing a call option but margin requirement is higher in this strategy as one needs to purchase the shares in the secondary market at market price before surrendering them to the option holder at exercise.
Purchasing an Uncovered Call: Capital Requirement = premium paid for purchasing a call option
Buying a Protective Put: Capital requirement = Price of the stock + premium paid for buying a put option. Margin requirement will be low.
Selling a Put: Capital Requirement = 0 and premium eared from selling a put option but the margin requirement is high in this strategy as one have the obligation to buy the stock when the option exercised but the stock prices will be lower in comparison of Writing an Uncovered Call strategy.
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