1.Explain the meanings of the following financial terms:

a. Option

b. Expiration date

c. Strike price

d. Call

e. Put

2.What is the difference between a European option and an American option? Are European options available exclusively in Europe and American options available exclusively in America?

3.Below is an option quote on IBM from the CBOE Web site.

a. Which option contract had the most trades today?

b. Which option contract is being held the most overall?

c. Suppose you purchase one option with symbol IBM GA-E. How much will you need to pay your broker for the option (ignoring commissions)?

d. Explain why the last sale price is not always between the bid and ask prices.

e. Suppose you sell one option with symbol IBM GA-E. How much will you receive for the option (ignoring commissions)?

f. The calls with which strike prices are currently in-the-money? Which puts are in-themoney?

g. What is the difference between the option with symbol IBM GS-E and the option with symbol IBM HS-E?

4.Explain the difference between a long position in a put and a short position in a call.

5.Which of the following positions benefit if the stock price increases?

a. Long position in a call

b. Short position in a call

c. Long position in a put

d. Short position in a put

6.You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time.

a. If the stock is trading at $55 in three months, what will be the payoff of the call?

b. If the stock is trading at $35 in three months, what will be the payoff of the call?

c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.

7.Assume that you have shorted the call option in Problem 6.

a. If the stock is trading at $55 in three months, what will you owe?

b. If the stock is trading at $35 in three months, what will you owe?

c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration.

8.You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time.

a. If the stock is trading at $8 in six months, what will be the payoff of the put?

b. If the stock is trading at $23 in six months, what will be the payoff of the put?

c. Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.

9.Assume that you have shorted the put option in Problem 8.

a. If the stock is trading at $8 in three months, what will you owe?

b. If the stock is trading at $23 in three months, what will you owe?

c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration.

10.What position has more downside exposure: a short position in a call or a short position in a put? That is, in the worst case, in which of these two positions would your losses be greater?