Practice Quiz #2

Each question is worth 1 point

(1)  Other things equal, a call option’s value increases as the strike price increases.

True                                                        False

(2)  Consider a long forward position and a long European call option position on the same underlying  asset with same settlement/maturity and same forward price/strike price. The long forward position will give a higher profit for low values of the underlying asset price.

True                                                        False

(3)  The cash flow from a put option (weakly) increases as the price of the underlying asset decreases.

True                                                        False

(4)  You buy a European call option with strike $80. On the expiration date the price of the underlying stock is $75. What is your cash flow at expiration? (You will have to input the answer into a box on Canvas)

(5)  You sell (short) a European put option with strike $80. On the expiration date the price of the underlying stock is $60. What is your cash flow at expiration? (You will have to input the answer into a box on Canvas)

(6)  You buy a European call option with strike K1  and short a European call option with strike K2  > K1 on the same underlying asset with the same expiration at T. When you set up the position at t, do you receive a cash inflow or a cash outflow?

(a)  A cash inflow

(b)  A cash outflow

(7)  You buy a European put option with strike K1 and short a European put option with strike K2  > K1 on the same underlying asset with the same expiration at T. If ST  > K2, do you make an overall pro  t?

(a)  Yes, you make a pro  t

(b)  No, you make a loss

(8)  Using calls  and puts  and by borrowing or lending at the risk-free rate, how can you create  a synthetic long position in a stock so that you pay St  today and get a cash  ow of ST  at time T? Assume markets do not allow any arbitrage.

(a)  Buy a call on the stock with strike K which expires at T, short a put on the stock with strike K which expires at T, and lend K.

(b)  Buy a call on the stock with strike K which expires at T, short a put on the stock with strike K which expires at T, and borrow K.

(c)  Short a call on the stock with strike K which expires at T, buy a put on the stock with strike K which expires at T, and borrow K.

(d)  Short a call on the stock with strike K which expires at T, buy a put on the stock with strike K which expires at T, and lend K.