Question

1. The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call

1. is out of the money.
2. is in the money.
3. can be exercised profitably.
4. is out of the money and can be exercised profitably.
5. is in the money and can be exercised profitably.

2. The maximum loss for a writer of a put option on a stock is

1. unlimited.
2. equal to the exercise price.
3. equal to the exercise price minus the put premium
4. higher than the stock price.
5. equal to the put premium.

3. Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

1. increases to $104.
2. decreases to $90.
3. increases to $106.
4. decreases to $96.
5. None of these is correct.

4. A European call option can be exercised

1. any time in the future.
2. only on the expiration date.
3. if the price of the underlying asset declines below the exercise price.
4. immediately after dividends are paid.
5. None of these is correct.

5. The maximum loss a buyer of a stock call option can suffer is equal to

1. the striking price minus the stock price.
2. the stock price minus the value of the call.
3. the call premium.
4. the stock price.
5. none of these is correct.

Answer 1

1.
is out of the money.

2.
equal to the exercise price minus the put premium

3.
increases to $106.

4.
only on the expiration date.

5.
the call premium.