Derivatives Final Exam ACTUAL
UPDATED Exam Questions and CORRECT
Answers
The price of a non-dividend paying stock is $19 and the price of a 3-month European call option
on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the
price of a 3-month European put option with a strike price of $20?
a. 2.01
b. 1.80
c. 3.12
d. 2.10 - CORRECT ANSWER - b. 1.80
What is a lower bound for the price of a 6-month call option on a non-dividend-paying stock
when the stock price is $80, the strike price is $75, and the risk-free interest rate is 10% per
annum?
a. 4.20
b. 8.29
c. 8.66
d. 9.01 - CORRECT ANSWER - c. 8.66
What is a lower bound for the price of a 2-month European put option on a non-dividend-paying
stock when the stock price is $58, the strike price is $65, and the risk-free interest rate is 5% per
annum?
a. 6.46
b. 5.39
c. 7.31
d. 5.46 - CORRECT ANSWER - a. 6.46
,The price of a European call that expires in 6 months and has a strike price of $30 is $2. The
underlying stock price is $29, and a dividend of $0.50 is expected in 2 months and again in 5
months. Risk-free interest rates (all maturities) are 10%. What is the price of a European put
option that expires in 6 months and has a strike price of $30?
a. 3.21
b. 2.51
c. 2.10
d. 5.20 - CORRECT ANSWER - b. 2.51
What is meant by a protective put? What position in call options is equivalent to a protective
put?
a. A protective put consists of a long position in a put option combined with a short position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
b. A protective put consists of a short position in a put option combined with a short position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
c. A protective put consists of a short position in a put option combined with a long position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
d. A protective put consists of a long position in a put option combined with a long position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash. - CORRECT ANSWER - d. A protective put consists of a long position in a put
option combined with a long position in the underlying shares. It is equivalent to a long position
in a call option plus a certain amount of cash.
Explain two ways in which a bear spread can be created.
, a. A bear spread can be created using two call options with the same maturity and different strike
prices. The investor shorts the call option with the lower strike price and buys the call option
with the higher strike price. A bear spread can also be created using two put options with the
same maturity and different strike prices. In this case, the investor shorts the put option with the
lower strike price and buys the put option with the higher strike price.
b. A bear spread can be created using two put options with the same maturity and different strike
prices. The investor shorts the put option with the lower strike price and buys the put option with
the higher strike price. A bear spread can also be created using two put options with the same
maturity and different strike prices. In this case, the investor shorts the put option with the lower
strike price - CORRECT ANSWER - a. A bear spread can be created using two call
options with the same maturity and different strike prices. The investor shorts the call option
with the lower strike price and buys the call option with the higher strike price. A bear spread
can also be created using two put options with the same maturity and different strike prices. In
this case, the investor shorts the put option with the lower strike price and buys the put option
with the higher strike price.
When is it appropriate for an investor to purchase a butterfly spread?
a. When the investor expects extreme volatiltiy.
b. A butterfly spread should be purchased when the investor considers that the price of the
underlying stock is likely to stay close to the central strike price.
c. A butterfly spread should be purchased when an investor who owns a bear spread is looking to
hedge their position
d. Almost never - CORRECT ANSWER - b. A butterfly spread should be purchased when
the investor considers that the price of the underlying stock is likely to stay close to the central
strike price.
What is the difference between a strangle and a straddle?
UPDATED Exam Questions and CORRECT
Answers
The price of a non-dividend paying stock is $19 and the price of a 3-month European call option
on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the
price of a 3-month European put option with a strike price of $20?
a. 2.01
b. 1.80
c. 3.12
d. 2.10 - CORRECT ANSWER - b. 1.80
What is a lower bound for the price of a 6-month call option on a non-dividend-paying stock
when the stock price is $80, the strike price is $75, and the risk-free interest rate is 10% per
annum?
a. 4.20
b. 8.29
c. 8.66
d. 9.01 - CORRECT ANSWER - c. 8.66
What is a lower bound for the price of a 2-month European put option on a non-dividend-paying
stock when the stock price is $58, the strike price is $65, and the risk-free interest rate is 5% per
annum?
a. 6.46
b. 5.39
c. 7.31
d. 5.46 - CORRECT ANSWER - a. 6.46
,The price of a European call that expires in 6 months and has a strike price of $30 is $2. The
underlying stock price is $29, and a dividend of $0.50 is expected in 2 months and again in 5
months. Risk-free interest rates (all maturities) are 10%. What is the price of a European put
option that expires in 6 months and has a strike price of $30?
a. 3.21
b. 2.51
c. 2.10
d. 5.20 - CORRECT ANSWER - b. 2.51
What is meant by a protective put? What position in call options is equivalent to a protective
put?
a. A protective put consists of a long position in a put option combined with a short position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
b. A protective put consists of a short position in a put option combined with a short position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
c. A protective put consists of a short position in a put option combined with a long position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash.
d. A protective put consists of a long position in a put option combined with a long position in
the underlying shares. It is equivalent to a long position in a call option plus a certain amount of
cash. - CORRECT ANSWER - d. A protective put consists of a long position in a put
option combined with a long position in the underlying shares. It is equivalent to a long position
in a call option plus a certain amount of cash.
Explain two ways in which a bear spread can be created.
, a. A bear spread can be created using two call options with the same maturity and different strike
prices. The investor shorts the call option with the lower strike price and buys the call option
with the higher strike price. A bear spread can also be created using two put options with the
same maturity and different strike prices. In this case, the investor shorts the put option with the
lower strike price and buys the put option with the higher strike price.
b. A bear spread can be created using two put options with the same maturity and different strike
prices. The investor shorts the put option with the lower strike price and buys the put option with
the higher strike price. A bear spread can also be created using two put options with the same
maturity and different strike prices. In this case, the investor shorts the put option with the lower
strike price - CORRECT ANSWER - a. A bear spread can be created using two call
options with the same maturity and different strike prices. The investor shorts the call option
with the lower strike price and buys the call option with the higher strike price. A bear spread
can also be created using two put options with the same maturity and different strike prices. In
this case, the investor shorts the put option with the lower strike price and buys the put option
with the higher strike price.
When is it appropriate for an investor to purchase a butterfly spread?
a. When the investor expects extreme volatiltiy.
b. A butterfly spread should be purchased when the investor considers that the price of the
underlying stock is likely to stay close to the central strike price.
c. A butterfly spread should be purchased when an investor who owns a bear spread is looking to
hedge their position
d. Almost never - CORRECT ANSWER - b. A butterfly spread should be purchased when
the investor considers that the price of the underlying stock is likely to stay close to the central
strike price.
What is the difference between a strangle and a straddle?
