Module 2: Forward Commitment and Contingent Claim Features and Instruments

Question 1

An investor buys a call for $5.75 that has a strike price of $130. If the value at expiration for this call is $17.80, the price of the underlying at expiration is closest to:

A. $112.20.

B. $142.05

C. $147.80.

Answer 1

la C
Answer Feedback: Correct because the value or “payoff to the call buyer” at expiration is cT = Max(0,ST – X) where X is the strike price, ST is the price of the underlying at expiration. Given the information in the stem we get $17.80 = Max(0,ST – $130). Hence, ST =$ 130 + $17.80 = $147.80.

Question 2

If ST denotes the price of the underlying at the expiration date and X is the exercise price of the option, the payoff at expiration to a call seller is best described as:

A. –Max(0, ST – X).

B. –Max(0, X – ST).

C. Max(0, ST – X)

Answer 2

Puse lab, es la a
crei que era la b porque el premium ya es algo que tiene, y después se le resta el stock price

Question 3

A call option that is sold for $4 has an exercise price of $40. If the price of the underlying is $43 at expiration, the value of the option to the seller is closest to:

A. –$3, and the loss to the seller is $1.

B. –$3, and the profit to the seller is $1.

C. $3, and the loss to the seller is $1.

Answer 3

Puse la C, y era la b
principalmente porque era un call seller
no un call buyer, leí y entendí mal, joder David
Answer Feedback: Correct because the value or payoff to the call seller is equal to –cT = –Max(0,ST – X), where ST is the price of the underlying at expiration and X is the exercise price. Here the value or payoff of the call to the seller is –Max(0,$43 – $40) = –$3. Further, the profit to the call seller is equal to Π = –Max(0,ST – X) + c0, where c0 is the option price or premium paid by the call buyer to the call seller. Therefore, the profit to the call seller is –Max(0,$43 – $40) + $4 = –$3 + $4 = $1.

Question 4

Assume that Biomian shares rise over the next six months. Which of the following statements about VFO’s derivative strategies under this scenario is most accurate?

A. A forward sale of Biomian shares in six months would be more profitable than purchasing the right to sell Biomian shares in six months.

B. Purchasing the right to sell Biomian shares in six months would be more profitable than a forward sale of Biomian shares in six months.

C. We do not have enough information to determine whether a forward sale or the right to sell Biomian shares will be more profitable in six months.

Answer 4

C. We do not have enough information to determine whether a forward sale or the right to sell Biomian shares will be more profitable in six months.
Not Selected
Feedback
General Feedback
C is correct. Under a forward sale of Biomian shares, the profit is [F 0(T) – ST ]. If the shares rise significantly over the next six months—that is, ST > F 0(T)—then VFO’s loss on the derivative is the difference between the Biomian forward price, F 0(T), and the spot price, ST . Under the long put option on Biomian shares, VFO’s profit is max(0, X – ST ) – p 0. If Biomian shares rise significantly over the next six months (i.e., ST > X), then the option expires worthless and VFO’s loss is limited to the put premium paid, p 0. If [F 0(T) – ST ] > –p 0, then VFO’s loss would be greater under the firm commitment than under the contingent claim.

Question 5

Which of the following statements best describes a feature of an option contract? In an option contract:

A. only the short can default.

B. only the long can default.

C. both the long and the short can default

Answer 5

PpUSE LA C, quizá no pensé suficientemente, era la A, evidentemente Answer Feedback: Correct. Only the short can default. This scenario occurs when the long exercises the option and the short fails to fulfill its obligation under the contract.

Question 6

An investor gathers the following information about a call option:
Option premium $5
Exercise price $25
Price of the underlying at initiation $15
At expiration, if the price of the underlying is $30, the value of the call option to the call seller is:
Correct answer:

A. −$5.

B. $0.

C. $10.

Answer 6

Puse la B
era y es la A.
sinceramente no leí lo de seller.
son las 00:00 pero no debería ser excusa. david tu puedes . teamo

Answer Feedback: Correct because –cT = –Max(0,ST – X) (payoff to the call seller), where –cT is the call value at expiration for the call seller, ST is the price of the underlying at expiration, and X is the strike price. Therefore, the correct calculation yields: –$5 = –Max(0,$30 – $25).