Question

9. If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 114, and at the expiration date the price is 110

A. your profit is $4000.

B. your loss is $4000.

C. your profit is $3000.

D. your loss is $1000.

10. Hedging by buying an option

A. limits gains.

B. limits losses.

C. limits gains and losses.

D. has no limit on option premiums.

11, An increase in the exercise price, all other things held constant, will ______ the call option premium.

A. increase

B. decrease

C. increase or decrease

D. Not enough information is given.

12. All other things held constant, premiums on options will increase when the

A. exercise price increases.

B. volatility of the underlying asset increases.

C. term to maturity decreases.

D. futures price increases.

Answer 1

9. As the option has expired out of money. The strike price is higher than the stock price at expiration. The option will expire worthless. So, the option holder will lose the amount of premium paid.

So, the correct option is option D.

10. Hedging by buying options:

By hedging through the purchase of options, an investor can limit his gains and losses. For example, hedong by buying a covered call option, limits the upside potential in a stock. Hedging by buying a protetcive put option, limits the downside potential of the stock.

So, the correct option is option C.

11. In the case of call options the more closer the strike price is to the stock price, the higher is the option premium. So, if the exercise price increases, the option will become less attractive and so the call premium will fall.

So, the correct option is option B.

12. The premium on options will increase when the volatility of the underlying asset increases. The higher the volatility of the stock, the higher is the attractiveness of the option.

So, the correct option is option B.