5. The maximum value of a call option is equal to: a. the strike price minus the

Question

5. The maximum value of a call option is equal to: a. the strike price minus the initial cost of the option. b. the exercise price plus the price of the underlying stock. c. the strike price. d. the price of the underlying stock. e. the purchase price. 6. Which one of the following statements is correct? a. The value of a call increases as the price of the underlying stock increases. b. The value of a call increases as the exercise price increases c. The value of a put increases as the price of the underlying stock increases d. The value of a put decreases as the exercise price increases. e·The intrinsic value of a put must be zero on the expiration date. 7. An increase in which of the following will increase the value of a call? I. time to expiration II. underlying stock price III. risk-free rate of return IV. price volatility of the underlying stock a. I and III only b. II, III, and IV only c. I, III, and IV only d. I, II, and III only e. I, II, III, and IV 8. Trenton Industrial Fans has a pure discount loan with a face value of $250,000 due in one year. The assets of the firm are currently worth $315,000. The sharcholders in this firm basically na option on the assets of the firm with a strike price of. a. put; $250,000. b. put; $315,000. c. warrant; S315,000. d. call; $250,000. e. call; $315,000. 9. Which one of the following entails the purchase of a put option on a stock to limit the downside risk associated with owning that stock? a. put-call parity b. covered call c. protective put d. straddle e strangle

Explanation / Answer

5)Call option gives right to it's holder to excercise it when stock price is more than strike price. For an option to have value its price at any time must be lower than stock price. This is because if option prices were higher than stock price, it would be cheap to buy stock directly. Therefore maximum price for an option is equal to stock price at that time

D) price of underlying securities

6)a) Value of call increases as the price of underlying asset increases

Call option gives right to it's holder to excercise it when stock price is more than strike price. Profit from excersice of call option = stock price-strike price ,thus as stock price increases value of call option will increase

7) e) I,II,III and IV

Increase in all of above will lead to increase in value of call

8) As firm pay off the loan the value of asset will increase thus there is call option on the firm's asset

Thus ans d) call of $250000

9) C) protective put

It involes buying put option on the stock already held in portfolio so to limit down side risk

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