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Exam 20: An Introduction to Derivative Markets and Securities

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Question 31

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Exhibit 20.6 Use the Information Below for the Following Problem(S) The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. $\begin{array} { c c c } \text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \\50 & \$ 1.50 & \$ 5.75 \\55 & \$ 3.25 & \ldots\end{array}$ -Refer to Exhibit 20.6.What is the value of a synthetic stock created with put and call options that expire in 6 months with an expiration price of $50?

A) $53.04
B) $53.53
C) $54.54
D) $55.03
E) $56.23

F) B) and D)
G) All of the above

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Question 32

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A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.

A) True
B) False

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Question 33

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A one year call option has a strike price of 50,expires in 6 months,and has a price of $4.74.If the risk free rate is 3%,and the current stock price is $45,what should the corresponding put be worth?

The payoffs diagrams to both long and short positions in a forward contract are asymmetrical around the contract price.

Forward and future contracts,as well as options,are types of derivative securities.

Which of the following factors is not considered in the valuation of call and put options?

A stock currently sells for $15 per share.A put option on the stock with an exercise price $20 currently sells for $6.50.The put option is

Assume that you purchased shares of a stock at a price of $35 per share.At this time you purchased a put option with a $35 strike price of $3.The stock currently trades at $40.Calculate the dollar return on this option strategy.

A stock currently sells for $150 per share.A call option on the stock with an exercise price $155 currently sells for $2.50.The call option is

Exhibit 20.3 Use the Information Below for the Following Problem(S) On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common stock selling at $37 1/2 per share and also considering an Olivia option. $\begin{array}{lcccc} &\quad\quad\quad\quad\quad\quad\quad\quad {\text { Calls }} &&\quad\quad\quad\quad\quad\quad\quad\quad {\text { Puts }} \\\text { Price } & \text { December } & \text { March } & \text { December } & \text { March } \\\hline 35 & 3\quad3 / 4 & 5 & 1\quad1 / 4 & 2 \\40 & 2\quad1 / 2 & 3\quad1 / 2 & 4\quad1 / 2 & 4\quad3 / 4\end{array}$ -Refer to Exhibit 20.3.If Bruce decides to buy a March call option with an exercise price of 35,what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?

Which of the following is not a factor needed to calculate the value of an American call option?

Holding a put option and the underlying security at the same time is an example of

Exhibit 20.5 Use the Information Below for the Following Problem(S) Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 20.5.If at expiration Peppy is selling for $42.00,what is Sarah's dollar gain or loss?

Futures contracts are slower to absorb new information than forward contracts.

A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.

A stock currently sells for $75 per share.A call option on the stock with an exercise price $70 currently sells for $5.50.The call option is

The initial value of a future contract is the price agreed upon in the contract.

Exhibit 20.1 Use the Information Below for the Following Problem(S) December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The current value of the S&P 500 stock index is 1178. -Refer to Exhibit 20.1.How much must you deposit in a margin account if you wish to purchase one contract?

Exhibit 20.7 Use the Information Below for the Following Problem(S) The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50. $\begin{array} { c c c } \text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \\\$ 45 & \$ 1.50 & \$ 6.75 \\\$ 50 & \$ 3.75 & \$ 4.25\end{array}$ -Refer to Exhibit 20.7.The intrinsic value for the put option with a $50 exercise price is

Forward contracts do not require an upfront premium.