Concept: These on-line quiz questions are not specifically linked to AIMs, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical AIM-by-AIM question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are well-suited to online simulation.
Questions:
410.1. Two European options, a call and a put, have the same strike price and maturity. The value of the call option is $3.26 and the value of the put option is $4.01. The risk-free rate is 3.0%. What are the lower bounds, respectively, of the call and put?
a. Lower bound of call is $2.00 and lower bound of put is $0.53
b. Lower bound of call is zero and lower bound of put is $0.75
c. Lower bound of call is $0.29 and lower bound of put is zero
d. Lower bound of call is $1.13 and lower bound of put is zero
410.2. About the value of European options and the advisability of early exercise of American options, each of the following is a true statement EXCEPT which is false?
a. The value of a European put option must be greater than its intrinsic value
b. The value of a at-the-money (ATM) European call must be greater than the value of an ATM European put on the same underlying non-dividend-paying stock where both options have the same maturity and strike price
c. It theory, the advisability of the early exercise of an American call option depends on whether the stock pays dividends: if the stock pays dividends, it may be advisable to early exercise the American call option; if the stock does not pay dividends, it is never advisable.
d. If an American put option is sufficiently deep in-the-money (ITM), then it should be exercised early
410.3. The risk-free rate is 3.0% per annum while the current price of a non-dividend-paying stock is $56.00. An underwater (OTM) European put option on the stock has a strike price of $42.00 and maturity of one year; the value of this European put is $1.06. Which is nearest to the value of a European call option with the same strike price ($42.00; i.e., an in-the money call option) and one-year maturity?
a. $7.49
b. $14.00
c. $16.30
d. $28.28
Answers here:
Questions:
410.1. Two European options, a call and a put, have the same strike price and maturity. The value of the call option is $3.26 and the value of the put option is $4.01. The risk-free rate is 3.0%. What are the lower bounds, respectively, of the call and put?
a. Lower bound of call is $2.00 and lower bound of put is $0.53
b. Lower bound of call is zero and lower bound of put is $0.75
c. Lower bound of call is $0.29 and lower bound of put is zero
d. Lower bound of call is $1.13 and lower bound of put is zero
410.2. About the value of European options and the advisability of early exercise of American options, each of the following is a true statement EXCEPT which is false?
a. The value of a European put option must be greater than its intrinsic value
b. The value of a at-the-money (ATM) European call must be greater than the value of an ATM European put on the same underlying non-dividend-paying stock where both options have the same maturity and strike price
c. It theory, the advisability of the early exercise of an American call option depends on whether the stock pays dividends: if the stock pays dividends, it may be advisable to early exercise the American call option; if the stock does not pay dividends, it is never advisable.
d. If an American put option is sufficiently deep in-the-money (ITM), then it should be exercised early
410.3. The risk-free rate is 3.0% per annum while the current price of a non-dividend-paying stock is $56.00. An underwater (OTM) European put option on the stock has a strike price of $42.00 and maturity of one year; the value of this European put is $1.06. Which is nearest to the value of a European call option with the same strike price ($42.00; i.e., an in-the money call option) and one-year maturity?
a. $7.49
b. $14.00
c. $16.30
d. $28.28
Answers here:
