Question

7. An XYZ OCT 30 call option is trading at a premium of 2 and 1/2. If XYZ is trading at 28, the option at which two of the following properties?

1. An intrinsic value of 2
2. An Intrinsic value of 0
3. A time value of 1
4. A time value of 2 and 1/2.

1. I and II
2. I and III
3. II and III
4. II and IV

11. A customer who is losing an XYZ put may be intended to do which two of the following?

1. Profit from an increase in the market price of XYZ which he currently owns.
2. Hedge against a decrease in the market price of XYZ that he currently owns.
3. Profit from a decrease in the market price of XYZ, which he currently does not own.
4. Hedge against a decrease in the market price of XYZ

a. I and II

b. I and III

c. II and III

d. III and IV

17. Which of the following strategies has essentially the same profit diagram as a short stock?

           a. a long put, long stock

           b. a short put, long call

           c. a long put, short call

           d. a short stock, long call

           e. none of the above

22. Which of the following strategies has essentially the same profit diagram as a covered call?

a.         a long put

b.         a short put

c.         a long call

d.         a short stock

e.         none of the above

Answer 1

Answer 7

The Correct answer is d. II and IV

Now, In the given Question,

Option Premium = 2 and 1/2

Current Market Price(CMP) = 28

Exercise Price( EP) = 30

Now,

Option Premium = Intrinsic value + Time value of option

Intrinsic value = Maximum of (CMP-EP,0)= Maximum of ( 28-30,0)= Maximum Of (-2,0)= 0

Time value of Option = Option Premium -Intrinsic Value= 2 and 1/2-0= 2and 1/2

Thus, as intrinsic value= 0 and Time value of option = 2and 1/2

Thus, d. is correct answer.

Answer 22

The Correct answer is b. Short Put

Covered Call and Short put have same risk and reward almost.

Covered Call involves buying a stock and then selling the call option i.e. selling the right to purchase that stock.

Short Put is to sell a right to sell.

Answer 11

The Correct answer is c. II and III

In case of Put option the buyer buys right to sell. He will only want to sell when the price at which he can exercise his right to sell is more than Current Price.

Now,

Option Premium of Put option = Exercise price*e-rt - Current Market price

Thus, we can clearly see that Premium on Put option in Indirectly related to Current Market Price.If Current Market Price will increase then premium shall decline.

Thus, profit or premium shall be earned when Current market price shall decline.

So, he shall make profits from decline in market price by hedging.