1. The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated. For questions 15 through 17, consider a bull money spread using the March 45/50 calls. What is the maximum loss on the spread? a. $500 c. $198 d. $802 e. none of the above
2. For questions 18 and 19, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 What will be the cost of the butterfly spread? a. $1,195 b. $637 c. $79 d. $1,045 e. none of the above
3. For questions 18 and 19, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 What will be the profit if the stock price at expiration is $52.50? a. $171 b. $1,421 c. $1.037 d. $421 e. none of the above
4. The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 This question is about a long box spread using the June 50 and 55 options. What is the cost of the box spread? a. $500 b. $2,018 c. $76 d. $484 e. none of the above
5. What is the profit if the stock price at expiration is $52.50? a. $16 b. $500 c. -$234 d. $250 e. none of the above
6. What is the net present value of the box spread? a. $9.84 b. $5.00 c. $16.00 d. $1.84 e. none of the above
7. Which of the following strategies does not profit in a rising market? a. put bull spread b. long straddle c. collar d. call bull spread e. none of the above
8. Which of the following transactions can have an unlimited loss? a. long straddle b. calendar spread c. butterfly spread d. reverse box spread e. none of the above