Problem 3: Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option.

B. The seller will be obliged to buy stock from the owner of the option.

C. The owner will not exercise his option.

D. The option will extend for nine more months.

E. None of the above options.

Problem 5: Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.

B. The value of one share of stock plus the exercise price.

C. The exercise price.

D. The value of one share of stock minus the exercise price.

E. None of the above options.

10. All else equal, as the underlying stock volatility decreases:

A. The put price increases.

B. The put price decreases.

C. The call price increases.

D. There is no effect on put price.

E. The put price can either increase, decrease, or remain the same.