Transcript
Chapter Fifteen
Other Derivative Assets
Multiple Choice
A primary advantage of futures options is that they
a. require no cash outflow when purchased.
b. permit the adjustment of portfolio risk/return exposure.
c. are guaranteed by the Securities Exchange Commission.
have larger premiums than other options.
ANSWER: B
The price of a futures option is a function of
a. time value and intrinsic value.
b. time value, intrinsic value, commodity exchange value.
c. time value, intrinsic value, futures value.
time value, futures value, commodity exchange value.
ANSWER: A
A person buys 1 Soybean futures call (5,000 bushels) @ $0.0445. What is his/her maximum possible loss?
a. $222.50
b. $445.00
c. $44.50
$22.25
ANSWER: A
Early exercise of futures options is sometimes optimal when
a. the underlying futures contract value is not changing.
b. the option becomes far outofthemoney.
c. the option becomes deep inthemoney.
the option delta approaches zero.
ANSWER: C
Futures options are best priced using the
a. Scholes options pricing model.
b. Black options pricing model.
c. BlackScholes option pricing model.
ScholesBlack option pricing model.
ANSWER: B
The holder of a futures option may do all of the following except
a. renew it.
b. exercise it.
c. sell it.
abandon it.
ANSWER: A
The expression for a futures option delta differs from the expression for a stock option delta by
a. a time value of money factor.
b. a conversion factor.
c. a duration factor.
a beta factor.
ANSWER: A
The BlackScholes option pricing model works least well with
a. index options.
b. equity options.
c. bluechip stock options.
foreign currency options.
ANSWER: D
A warrant hedge is similar to a _____ strategy.
a. covered call
protective put
long call
long put
ANSWER: A
10. When-issued shares tend to sell
a. for slightly less than they theoretically should.
b. for slightly more than they theoretically should.
c. for their theoretical value.
d. for the same price as the existing shares.
ANSWER: B
True/False
A foreign currency call is the same as a dollar put in the foreign currency.
ANSWER: T
Early exercise of futures options is never optimal.
ANSWER: F
The purchase of a futures option involves a predetermined maximum possible loss.
ANSWER: T
Most futures options expire in the stated futures delivery month.
ANSWER: F
Warrants are like longterm put options.
ANSWER: F
Short Answer/Problem
A speculator buys a July corn futures contract at $2.18/bu. and simultaneously writes a July 220 corn futures call option at 8 cents. Calculate the speculator's combined gain or loss if the price of corn rises to 235 and the option is exercised.
ANSWER:
Gain on futures: ($2.20 - $2.18) x 5,000 = $1.00
Premium from options: $0.08 x 5,000 = $400
Total gain = $500
One hundred shares of a stock are purchased for $45 per share. Simultaneously, a 5year warrant on the same company is sold short @ $8. The warrant permits the purchase of 100 shares of stock from the company at $55. Over the next five years, a total of $2.50 in dividends is received on each share. What is your profit or loss if, at the end of the warrant's life, the stock price is
a. $40
b. $50
c. $60
ANSWER:
Stock price at warrant expiration
40
50
60
Stock
500
500
1500
Dividends
250
250
250
Warrant
800
800
800
Total
550
1550
2050
