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Question:
An increase in volatility of the underlying increases the value of both calls and puts.
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Consider the following statements:Statement 1: There is never a reason to exercise an American call option early.Statement 2: There is never a reason to exercise an American put option early.Which of the following is most likely if the underlying on the options is a non-dividend-paying stock?
Only Statement 2 is incorrect.
The time value of an option is most accurately described as:
equal to the entire premium for an out-of-the-money option.
At initiation of a forward contract and a futures contract with identical terms, their prices are most likely to be different if:
short-term interest rates are negatively correlated with futures prices.
Which of the following statements about call options is least accurate?
The buyer of a call option has an obligation to perform.
Under which of the following conditions does a forward contract have a positive value to the short party at expiration?
The spot price of the underlying asset is less than the forward price.
An investor has a call option on a stock that is currently selling for $35. The call option is in the money by $3. The call option’s strike price is:
$32.
An investor buys a stock for $40 per share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3 per share. Ignoring dividends and transaction costs, what is the maximum profit the writer of this covered call can earn at expiration?
$5.
Henry sold a call option with an exercise price of $75 for $4. Henry’s profit if the stock trades at $81 at option expiration is closest to:
$2 loss.
An analyst sells a call option for $7 on a stock that he already owns. Assuming that the exercise price of the option is $88 and that the stock currently trades at $86, her breakeven point on the strategy is closest to:
$79.
Open interest in a futures market is most accurately described as the total number of:
contracts outstanding.
Compared to an otherwise identical European put option, one that has a longer time to expiration:
may be worth less than the put that is nearer to expiration.
In the futures market, if a trader receives a margin call, she must make a deposit in her margin account such that the balance in her account is at least equal to the:
Initial margin requirement.
A put on a stock with a strike price of $50 is priced at $4 per share, while a call with a strike price of $50 is priced at $6. What is the maximum per share loss to the writer of the put?
$46.
Given the put-call parity relationship, a synthetic underlying asset can be created by forming a portfolio of a:
long call, short put, and long risk-free bond.
Two Level I CFA candidates are discussing futures and make the following statements: Candidate 1: Futures are traded using standardized contracts. They require margin and incur interest charges on the margin loan. Candidate 2: If the margin balance falls below the maintenance margin amount due to a change in the contract price for the underlying assets, the investor must add funds to bring the margin back up to the initial margin requirement. Are the candidates’ statements correct or incorrect?
Only one of the statements is correct.
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