5. You purchase one IBM September 160 put contract for a premium of $2.62. What is your maximum possible profit? (See Figure 15.1.

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1 OPEN QUESTIONS 4. Turn back to Figure 15.1, which lists the prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following January 2012 expiration options, assuming that the stock price on the expiration date is $165. a. Call option, X b. Put option, X c. Call option, X d. Put option, X e. Call option, X f. Put option, X You purchase one IBM September 160 put contract for a premium of $2.62. What is your maximum possible profit? (See Figure 15.1.) ( 6. An investor buys a call at a price of $4.50 with an exercise price of $40. At what stock price will the investor break even on the purchase of the call? 8. the value of a put option at expiration is: Option value Short put -4 Long put 4 Exercise price 80 Ignoring transaction costs, which of the following statements about the value of the put option at expiration is true? a. The expiration value of the short position in the put is $4 if the stock price is $76. b. The expiration value of the long position in the put is 2$4 if the stock price is $76. c. The long put has a positive expiration value when the stock price is below $80. d. The value of the short position in the put is zero for stock prices equaling or exceeding $ An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The investor sells a call for $.50 with a strike price of $40. What is the maximum profit and loss for this position? Draw the profit and loss diagram for this strategy as a function of the stock price at expiration

2 ANSWERS 4 Cost Payoff Profit Call option, X = Put option, X = Call option, X = Put option, X = If the stock price drops to zero, you will make $80 $5.72 per stock, or $ Given 100 units per contract, the total potential profit is $7, The price has to be at least as much as the sum of the exercise price and the premium of the option to breakeven: $40 + $4.50 = $ Option c is the only correct statement. a. The value of the short position in the put is $4 if the stock price is $76. b. The value of the long position in the put is $4 if the stock price is $76. d. The value of the short position in the put is zero for stock prices equaling or exceeding $80, the exercise price. 10. The initial outlay of this position is $38, the purchase price of the stock, and the payoff of such position will be between two boundaries, $35 and $40. a. The maximum profit will thus be: $40 $38 = $2, and the maximum loss will be: $35 $38 = $3. b. Value Payoff Profit S T

3 MULTIPLECHOICES 80. A convertible bond is deep in the money. This means the bond price will closely track the. A. straight debt value of the bond B. conversion value of the bond C. straight debt value of the bond minus the conversion value D. straight debt value of the bond plus the conversion value 81. Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not. A. I only B. I and II only C. II and III only D. I, II, and III 6.An American-style option will be valuable than a style option. A. more; European- B. less; European- C. more; Canadian- D. less; Canadian- 8. At contract maturity the value of a put option is, where X equals the option's strike price and ST is the stock price at contract expiration. A. max (0, ST - X)

4 B. min (0, ST - X) C. max (0, X - ST) D. min (0, X - ST) 15. You purchase a call option on a stock. The profit at contract maturity of the option position is, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A. max (-C0, ST - X - C0) B. min (-C0, ST - X - C0) C. max (C0, ST - X + C0) D. max (0, ST - X - C0)

5 80 B 81 D 6 A 8 C 15 A

6 Exercises 1.Call option exercise price 3 current stock price 2,95 Option price November 0,7 December 0, 4 January 1,1 Call option current stock price 3 Exercise date November Exercise price option price 3,1 0,6 3,6 0,3 4 0,9 You notice two different mistakes. Where are they? 2. At the beginning call option expiration date december Current stock price 3,5 Premium 0.5 Exercise price 3,7 Intrinsic value? Time value? 3. At the beginning call option (American) expiration date 60 days Current stock price 3,5 Premium 0.5 Exercise price 3,7 Intrinsic value?

7 Time value? After 30 days Current price 3,8 Premium? Intrinsic value? Time value?

8 1 December 0, 4 Strike 4 premium 0,9 2. Intrinsic value 0 Time value 0,5 3. Intrinsic value 0 Time value 0,5 Premium 0,1 + 0,25 = 0,35 Intrinsic value 0,1 Time value 0,25