Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract.
1. What is your profit if you buy a call, hold it to expiration and the stock price at expiration is $37?
a. $700 b. -$289 c. $2,711 d. $411 e. none of the above
2. What is the breakeven stock price at expiration on the transaction described in problem 1?
a. $32.89 b. $30.00 c. $27.11 d. $32.15 e. there is no breakeven
3. What is the maximum profit on the transaction described in problem 1?
a. $2,711 b. infinity c. zero d. $3,289 e. $3,000
4. What is the maximum profit that the writer of a call can make?
a. $2,711 b. $289 c. $3,000 d. $3,289 e. none of the above
5. Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33. How much profit would the buyer make?
a. $32.89 b. $30.11 c. $78.00 d. $11.00 e. none of the above
6. Suppose the investor constructed a covered call. At expiration the stock price is $27. What is the investor's profit?
a. $589 b. $289 c. $2,989 d. $2,711 e. none of the above
7. What is the breakeven stock price at expiration for the transaction described in problem 6?
a. $27.11 b. $30.00 c. $32.89 d $29.89 e. none of the above
8. If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?
a. $600 b. $311 c. $889 d. $229 e. none of the above
9. What is the maximum profit from the transaction described in Question 6 if the position is held to expiration?
a. $3,289 b. $289 c. infinity d. $2,711 e. none of the above
10. What is the minimum profit from the transaction described in Question 6 if the position is held to expiration?
a. -$2,711 b. -$3,289 c. -$3,000 d. negative infinity e. none of the above