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TRUE/FALSE TEST QUESTIONS T F 1. The maximum loss on a call purchase is the premium on the call. T F 2. Buying a put is the mirror image of buying a call. T F 3. Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price. T F 4. To maximize profits on a call purchase, one should hold the position for as short a time as possible. T F 5. Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration. T F 6. A covered call writer will make a lower profit if the option is exercised early. T F 7. The holder of a protective put has the equivalent of an insurance policy on the stock. T F 8. A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market. T F 9. An investor can construct a synthetic put by buying a call and selling short a stock. T F 10. An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not. T F 11. The profit for a long put is higher for a given stock price if the put is sold back prior to expiration. T F 12. Given two bearish investors, the more risk averse investor would tend to select a put with a higher exercise price. T F 13. Both call and put writers have the potential for unlimited losses. T F 14. In the context of insurance, protective put buyers who choose lower exercise prices are essentially using higher deductibles. T F 15. As long as puts are available for trading, there is little justification for constructing synthetic puts. T F 16. Covered calls are a less costly way to protect stocks because you receive money for the sale of the call, whereas you must pay money for a protective put. T F 17. To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium. T F 18. A covered call provides protection for a stock price at expiration down to the current stock price minus the premium. T F 19. Covered call writing should be considered a strategy to enhance the return on a stock. T F 20. A protective put provides the same type of profit diagram as a long call. T F 21. A covered call with a higher exercise price has a higher breakeven. T F 22. The profit from a covered call is the profit from a long stock plus the profit from a long call. T F 23. A synthetic put is always less expensive than a synthetic call. T F 24. Any strategy consisting of only long options will lose money if the stock price stays the same. T F 25. The breakeven for a protective put is the same as that for a covered call. T F 26. The following is the profit equation for a put option: ? = N P [Max(0, X ' S T ) + P]. T F 27. If S T ? X, then the profit for a call option can be expressed as: ? = S T ' X ' C. T F 28. The break-even stock price equation is similar for both calls and puts, the strike price plus the option premium. T F 29. Selling a put is a bullish strategy that has a limited gain (the premium) and a large, but limited, potential loss. T F 30. A long put option position can be synthetically created by purchasing a call option, short selling the stock, and purchasing a pure discount bond with face value equal to the strike price. Jan 16 2014 10:40 PM

 

Solution ID:609184 | This paper was updated on 26-Nov-2015

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