Question

(11 Suppose that Facebook stock is currently priced at $170 per share and you have bought a put option with the strike price at $150 per share. The option premium is $10. The intrinsic value of your option is A) -$10. B) $0. C) $10. D) $20. One share of General Electric stock is priced at $10 today. Both options below are on General Electric stock and expire in 3 months. Option A Option B Type Call option Put option Strike price Option premium $10 $13 A) If you buy option A, and in three months the stock price remains at $10 (assume no dividend is paid by the stock), your (net) rate of return is -100%. B) If you buy option A, and in three months the stock price becomes $12 (assume no dividend is paid by the stock), your (net) rate of return is 100%. C) If you buy option B, and in three months the stock price becomes $12 (assume no dividend is paid by the stock), your (net) rate of return is -50%. D) All of the above 13. Which of the following is an advantage of options contracts over futures contracts? A) options hedge against a negative outcome while still allowing profits from a positive outcome. B) options are less expensive than futures. C) investors cannot hedge risk by trading futures.

Answer 1

Hello Sir/ Mam

Q - 11 - OPTION B : $0

Share Price $170 per share

Exercise Price of Put = $150

Hence,

Intrinsic Value = $0

Q - 12 - OPTION D : All of the above

• With investment of $1, final payout if $0
• With investment of $1, final payout if $2.
• With investment of $2, final payout is $1.

Q - 13 - OPTION A

Options can provide you a negative hedge and still allow you to enjoy profit in the upside move.

For example, in case of call option, it provide a hedge for downfall, as we will have a limited loss on the downside, while we can have a unlimited profit on the upside.

Thanks!

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