An investor has a short position in a forward contract lasting two years.The ass
ID: 2781957 • Letter: A
Question
An investor has a short position in a forward contract lasting two years.The asset price in two years is ST and the delivery price is K.Which of the following is the payoff to the investor (circle one)
a.ST - K
b.K - ST
c.max (ST – K, 0)
d.max (K - ST, 0)
Which of the following is not true (circle one)
a.When a CBOE option on IBM is exercised, IBM issues more stocks.
b.An American option can be exercised at any time during its life.
c.An call option will always be exercised at maturity if the underlying asset price is greater than the strike price.
d.An put option will always be exercised at maturity if the underlying asset price is lower than the strike price.
Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due.In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cash flow of the firm is less than $10 million?
The option is in-the-money and the stockholders earn the difference between the cash flow and the bondholder’s promised payment.
The option is in-the-money and the bondholders earn the entire cash flow.
The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow.
The option is out-of-the-money, and the stockholders make up the difference so that the bondholders receive full payment.
If the stock price rises, the price of a call option on that stock __________ and that of a put option __________.
a. decreases, increases
b. decreases, decreases
c. increases, decreases
d. increases, increases
Explanation / Answer
d.max (K - ST, 0)
a.When a CBOE option on IBM is exercised, IBM issues more stocks.
The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow.
c. increases, decreases
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