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What is the net profit for the put option writer

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Reference no: EM13984955

1. Consider two periods: The period before expiration (denoted by "Period 0") and expiration period ("Period T"). You purchased an option with the strike price of $20. The spot price was $20. Assume that the spot price (the price of underlying asset) remained the same as $20 at period 0 and T. Which of the following is true?

A. The option price at 0 is higher than the price of the option at T.

B. The option price at 0 is less than the price of the option at T.

C. The option price at 0 is equal to the price of the option at T.

D. Cannot determine whether how the option price changes.

2. Which of the following is not always true about option exercise?

a. Exercise if gross profit > 0.

b. Exercise if net profit > 0.

c. Exercise if gross profit > 0 even thought net profit < 0.

d. No exercise if net profit < 0.

3. A trader buys 100 European call option contracts with a strike price of $20 and a time to maturity of one year. The size per one contract is 4. The cost of each option is $2. The price of he underlying asset proves to be $25 in one year. What is the net profit when exercised at expiration?

A. $800 <= NP < $1100

B. $1100 <= NP < $1400

C. NP < $500

D. $1400 <= NP

E. $500 <= NP < $800

4. A trader issues (writes) 10 European put option contracts with a strike price of $50 and a time to maturity of six months. The price received for each put option is $4. The price of the underlying asset is $41 in six months. The contract size of the option is 50. What is the net profit for the put option writer at expiration?

a. -$2000 <= NP < -$1000

b. -$1000 <= NP < 0

c. 0 <= NP

d. NP < -$3000

e. -$3000 <= NP < -$2000

5. GS, Inc. stock is selling for $28 a share. A 3-month call on GS stock with a strike price of $30 is priced at $1.50. Risk-free assets are currently returning 0.3% per month. What is the price of a 3-month put on GS stock with a strike price of $30? : (Hint: use the Put-call parity)

A. $2.73

B. $3.23

C. $0.50

D. $4.02

E. $2.02

6. Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to:

a. the share of stock plus the put option

b. the value of a U.S. Treasury bill

c. the current market value of the stock.

d. a put option minus the market value of the share of stock.

e. the present value of the stock minus a put option.

7. Assume the price of the underlying stock decreases. How will the values of the options respond to this change?

I. strike price

II. time to maturity

III. standard deviation of the returns on a risk-free asset

IV. risk-free rate

A. I and IV only

B. II and III only

C. II and IV only

D. I and III only

E. I only

8. For a non-dividend paying stock, it is better to sell than to exercise an American call option.

A. Yes, only if the bid price is higher than the intrinsic value for a market order

B. Yes, only if the ask price is higher than the intrinsic value for a market order

C. Yes, only if the bid price is lower than the intrinsic value for a market order

D. Yes, always whether it is a limit or a market order

E. No, always whether it is a limit or a market order

Verified Expert

This assignment is based on the concepts of basic finance. It includes the multiple choice question from the period before expiration, gross and net profit, strike price, sale price, put option, call option, Put-Call parity option. Also, it includes the standard deviation, non-dividend paying stock etc.

Reference no: EM13984955

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