FIN 470 EXAM 2 QUESTIONS WITH ACCURATE ANSWERS
An asset can go up or down 10%, the spot price is $100. What is the price of a call
in the one -period binomial model if r = 5% (
Δ = .5)?
A. $6.87
B. $7.14
C $7.77
D. $8.03 correct answer B. 7.14
C = Δ x S ( 1 + r - U) + C (up) / (1+5)
C = .5 x 100 (1.05 - 1.1) +10 / (1.05) = 7.14
An asset can go up or down 10%, the spot price is $100. What is Δ in the one -
period binomial model if r = 5%?
A. .25
B. .50
C. .75
D. .85 correct answer B. .50
The asset is worth 110 or 90
the call is worth $10 or 0
,Δ = (10-0) / (110-90) = .5
An asset has a price = $35. Suppose a put costs $6 and a call costs $8 (strike = $35)
and the discount rate = 5%. Does Put-Call Parity hold?
A. Yes, it holds
B. No, the put should equal 6.33
C. No, the put should equal 35
D. No, the put should equal 5.33 correct answer B. no the put should equal 6.33
P = C -S + (K / 1 + r)^t
6 = 8- 35 + (35/ 1.05 ^ 1)
6 does not equal 6.33
Apr 146.50 call - premium = 4.50 Gives the right to buy shares at $146.50 If spot =
$147 and the option expires today, what are your profits?
A. Negative, don't exercise
B. $500
C. $1000
D. -$4000
E. None of the above correct answer D. -$4000
buy shares at 146.50 and sell at 147
, made .50 on the options but lost 4.50 on premium
4.50 - .50 = $4.00 loss per share
4.00 x 1000 = $4,000
why exercise? because losing $4,000 is better than losing $4,500
Apr 147.50 call - premium = 3.99 Gives the right to buy shares at $147.50. If spot =
$147 and the option expires today, what are your profits?
A. $3,990
B. -$3,990
C. $1000
D.= $500
E. None of the above correct answer B. -$3,990
buy shares at $147.50 and sell at $147 = out of the money do not exercise
option costs 3.99 x 1000 shares = 3, 990
benefits of futures and forwards correct answer futures
- no counter party risk, standardized implies higher liquidity
forwards
- customized (date/amount)
An asset can go up or down 10%, the spot price is $100. What is the price of a call
in the one -period binomial model if r = 5% (
Δ = .5)?
A. $6.87
B. $7.14
C $7.77
D. $8.03 correct answer B. 7.14
C = Δ x S ( 1 + r - U) + C (up) / (1+5)
C = .5 x 100 (1.05 - 1.1) +10 / (1.05) = 7.14
An asset can go up or down 10%, the spot price is $100. What is Δ in the one -
period binomial model if r = 5%?
A. .25
B. .50
C. .75
D. .85 correct answer B. .50
The asset is worth 110 or 90
the call is worth $10 or 0
,Δ = (10-0) / (110-90) = .5
An asset has a price = $35. Suppose a put costs $6 and a call costs $8 (strike = $35)
and the discount rate = 5%. Does Put-Call Parity hold?
A. Yes, it holds
B. No, the put should equal 6.33
C. No, the put should equal 35
D. No, the put should equal 5.33 correct answer B. no the put should equal 6.33
P = C -S + (K / 1 + r)^t
6 = 8- 35 + (35/ 1.05 ^ 1)
6 does not equal 6.33
Apr 146.50 call - premium = 4.50 Gives the right to buy shares at $146.50 If spot =
$147 and the option expires today, what are your profits?
A. Negative, don't exercise
B. $500
C. $1000
D. -$4000
E. None of the above correct answer D. -$4000
buy shares at 146.50 and sell at 147
, made .50 on the options but lost 4.50 on premium
4.50 - .50 = $4.00 loss per share
4.00 x 1000 = $4,000
why exercise? because losing $4,000 is better than losing $4,500
Apr 147.50 call - premium = 3.99 Gives the right to buy shares at $147.50. If spot =
$147 and the option expires today, what are your profits?
A. $3,990
B. -$3,990
C. $1000
D.= $500
E. None of the above correct answer B. -$3,990
buy shares at $147.50 and sell at $147 = out of the money do not exercise
option costs 3.99 x 1000 shares = 3, 990
benefits of futures and forwards correct answer futures
- no counter party risk, standardized implies higher liquidity
forwards
- customized (date/amount)
