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.