Option payoffs: What is the payoff for a put option with a strike price of $20 if the price of the underlying stock at expiration is $18?

Option payoffs: What is the payoff for a put option with a strike price of $20 if the price of the underlying stock at expiration is $18?

A) $0
B) $2
C) $18
D) $20





Answer: B

Option payoffs: You have sold a call option on ABC Co. stock with a strike price of $40. You do not intend to make any other transactions before the options expiration date. The current stock price is $20. Which of the following statements best describes your hopes for the stock?

Option payoffs: You have sold a call option on ABC Co. stock with a strike price of $40. You do not intend to make any other transactions before the options expiration date. The current stock price is $20. Which of the following statements best describes your hopes for the stock?

A) You want the stock price to fall.
B) You want the stock price to rise.
C) You are indifferent, as long as the stock price stays under $40.
D) It doesn't matter; you are indifferent to changes in the stock price.

Answer: C

Option payoffs: You own a put option on ABC. Co. stock with a strike price of $40. The current stock price is $40. You will benefit if

Option payoffs: You own a put option on ABC. Co. stock with a strike price of $40. The current stock price is $40. You will benefit if

A) the stock price goes up.
B) the stock price goes down.
C) the stock price stays the same.
D) It doesn't matter; you are indifferent to changes in the stock price.

Answer: B

Option payoffs: What is the payoff for a call option with a strike price of $45 if the underlying stock price at expiration is $75?

Option payoffs: What is the payoff for a call option with a strike price of $45 if the underlying stock price at expiration is $75?

A) $30
B) $45
C) $75
D) None of the above




Answer: A

A local city government has awarded a contract to sequentially build five new elementary schools over the next 10 years. The price for each school has been spelled out in the contract, but at the beginning of each year the city can cancel the order for the remaining schools. The city government is concerned that if the population of the town does not grow as expected it may not need all of the schools. What sort of financial option does the option to cancel the order resemble?

A local city government has awarded a contract to sequentially build five new elementary schools over the next 10 years. The price for each school has been spelled out in the contract, but at the beginning of each year the city can cancel the order for the remaining schools. The city government is concerned that if the population of the town does not grow as expected it may not need all of the schools. What sort of financial option does the option to cancel the order resemble?

A) Owning a call option on the value of the new schools
B) Owning a put option on the value of the new schools
C) Selling a call option on the value of the new schools
D) Selling a put option on the value of the new schools

Answer: A

RealEstates LLP is considering the construction of a new development of condominiums in downtown Austin, Texas. The site for the new development is currently occupied by an office building owned by the city. The project's profitability will depend largely on the population increase in Austin over the next several years. Rather than buy the site, RealEstates has entered into an agreement with the city to pay $200,000 for the right to purchase the site for $10 million two years from now. The real option embedded in this contract is best described as

RealEstates LLP is considering the construction of a new development of condominiums in downtown Austin, Texas. The site for the new development is currently occupied by an office building owned by the city. The project's profitability will depend largely on the population increase in Austin over the next several years. Rather than buy the site, RealEstates has entered into an agreement with the city to pay $200,000 for the right to purchase the site for $10 million two years from now. The real option embedded in this contract is best described as

A) the option to defer investment.
B) the option to make follow-on investments.
C) the option to change operations.
D) the option to abandon projects.

Answer: A