Question

QUESTION 1

Michael opened a margin account with a discount, online broker. Two months ago he sold short 100 shares of stock; the market price of the stock at that time was $63.50. Today it is priced at $47.30. If he decides to “buy to close” (i.e., buy 100 shares of stock in order to close his open “short position”) what will be his net gain or loss? (For purposes of this problem assume each trade costs $25.)

$1,620 gain

$1,570 gain

$1,620 loss

$33.80 loss

QUESTION 2

Janice owns 1000 shares of Microsoft stock in a margin account. She writes 10 covered call options (American options) at a strike price of $30. Elissa purchases the 10 call options at a premium price of $1.45. Which of the following statements are true regarding this transaction?

(1) Janice, the call writer, receives the premium payment from Elissa

(2) Elissa, the call buyer, is obligated to exercise the call option sometime before expiration

(3) Janice is obligated to perform (i.e., deliver the shares) if Elissa elects to exercise the 10 call options anytime up to expiration

(4) Elissa has the right to call away the shares from Janice or to sell the call options to someone else up to the time of expiration

1 and 2

1, 2, 3 and 4

3 and 4

1, 3 and 4

QUESTION 3

You manage a $500,000 stock portfolio for your client. The client is very concerned about a market sell-off and wants to hedge the long portfolio. Which of the following futures indexes would best be used as the hedging instrument?

S&P 100 Index, r-squared 58

Russell 3000 Index, r-squared 87

Dow Jones Industrial, r-squared 46

S&P 400 Index, r-squared 94

QUESTION 4

The ask price for the June ABC $50 put option is $1.45. How much will the hedge cost your client if she owns 1,000 shares of ABC stock, and she wants to hedge her total position?

$145.00

$1,450.00

$5000.00

$14.50

QUESTION 5

Holding all other factors constant, what will an increase in implied volatility do to option prices?

cause the option price to decline

no effect on pricing for markets already trading

cause the option price to increase

none of the above

QUESTION 6

Delta is defined as:

the percentage change in the value of an option for a one percent change in the value of the underlying asset.

the change in the value of the underlying asset for a dollar change in the call price.

the change in the value of an option for a dollar change in the price of the underlying asset.

the change in the volatility of the underlying stock price.

Answer 1

Answer 1st

Price of shares sold = $63.50

Close position (buying price) = 47.30

Profit on transaction = (no. of shares * (Selling value - buying value) )

(100* (63.50 - 47.30))

= 1620

Net profit or gain = Profit on Transaction - Transaction cost

1620 - 25 - 25

= $1570

So, net profit or gain on transaction is $1,570.

(each trade cost $25, so two time cost o $25 is incurred.)

Note required to answer 1st different question as per HomeworkLib