Corporate Financial Design AFIN353


Tutorial 8, Week 10

Homework questions.

Question 103  option

Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered.

Image of option graphs



Question 122  option

You have just sold an 'in the money' 6 month European put option on the mining company BHP at an exercise price of $40 for a premium of $3.

Which of the following statements best describes your situation?



Question 274  derivative terminology, option

The 'option price' in an option contract is paid at the start when the option contract is agreed to. or ?


Question 276  derivative terminology, option

The 'option strike price' in an option contract, also known as the exercise price, is paid at the start when the option contract is agreed to. or ?


Question 304  option

Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation?



Question 334  option

Which option position has the possibility of unlimited potential losses?



Question 271  CAPM, option, risk, systematic risk, systematic and idiosyncratic risk

All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.
If the idiosyncratic variance of an asset increases, its price will be unchanged.

What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer.

Call and put option prices increase when the:



Question 305  option, short selling, speculation

You believe that the price of a share will fall significantly very soon, but the rest of the market does not. The market thinks that the share price will remain the same. Assuming that your prediction will soon be true, which of the following trades is a bad idea? In other words, which trade will NOT make money or prevent losses?



Question 125  option, speculation, market efficiency

Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year.

Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year.

What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)?

Assume that:

  • Only the spot price is expected to increase and there is no change in expected volatility or other variables that affect option prices.
  • No taxes, transaction costs, information asymmetry, bid-ask spreads or other market frictions.