Investments Final Review Exam - Questions and Answers

Investments Final Review Exam - Questions and Answers You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to: $52 and $68 The put-call parity theorem: a) Represents the proper relationship between put and call prices b) Allows for arbitrage opportunities if violated c) May be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered d) All of the options e) None of the options Protective puts offer an advantage over stop-loss orders in that: the stop-loss order will be executed as soon as the stock price reaches the trigger point, without allowing for a subsequent rebound, while the put allows the holder to wait; the stop-loss order may actually be executed at a price below the trigger price HighFlyer stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk free interest rate is 6%. What is the price of a one-year put with strike price of $55? $12.89 Currency options and currency futures options have different values because: the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? $6.23 Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? $15.26 Derivative securities are also called contingent claims because: their payoffs depend on the prices of other assets Exchange-traded stock options expire: on the third Friday of the expiration month An option with an exercise price equal to the underlying asset's price is: at the money To the option holder, put options are worth ____ when the exercise price is higher; call options are worth ____ when the exercise price is higher. more; less What happens to an option if the underlying stock has a 2-for-1 split? the exercise price would become half of what it was and the number of options held would double Before expiration, the time value of an in the money call option is always: Positive Before expiration, the time value of an in the money put option is always: Positive Before expiration, the time value of an at the money call option is always: Positive Before expiration, the time value of an at the money put option is always: Positive A call option has an intrinsic value of zero if the option is: at the money or out of the money A put option has an intrinsic value of zero if the option is: at the money or out of the money Prior to expiration: the actual value of call option is greater than the intrinsic value Prior to expiration: the actual value of a put option is greater than the intrinsic value If the stock price increases, the price of a put option on that stock ____ and that of a call option ____. decreases; increases If the stock price decreases, the price of a put option on that stock ____ and that of a call option ____. increases; decreases Other things equal, the price of a stock call