quiz3 2014Fa

Topics: Option, Call option, Put option Pages: 3 (373 words) Published: April 17, 2015
2014 Fall Fin 433 Quiz #3
1.Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth? a.C + P – Xe-rtb.C – S0c.P – Xd.P + S0 – Xe-rte.none of the above 2.What is the lowest possible value of a European put?

a.Max(0, X – S0)b.Xe-rtc.Max[0, S0 – Xe-rt )d.Max[0, Xe-rt – S0)]e.none of the above The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 3 and 4.

Calls
Puts

Strike

Nov

Dec

Jan

Nov

Dec

Jan

105

8.40

10

11.50

5.30

1.30

2.00

110

4.40

7.10

8.30

0.90

2.50

3.80

115

1.50

3.90

5.30

2.80

4.80

4.80

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.

3.What is the intrinsic value of the December 115 put?
a.1.75b.0.00c.3.90d.3.00e.none of the above

4.Suppose you knew that the January 115 options were correctly priced but suspected that the stock was mispriced. Using put-call parity, what would you expect the stock price to be? For this problem, treat the options as if they were European. a. 113.67b. 123.23c. 121.23d. 112.77e. none of the above 5. Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world and a call option on the stock has an exercise price of 80. What would be the call's price if the stock goes up? a.3.60b.8.00c.5.71d....
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