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CHAPTER 7: ADVANCED OPTION STRATEGIES MULTIPLE CHOICE TEST QUESTIONS The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is .35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 Use this information to answer questions 1 through 20. Assume that each transaction consists of one contract (100 options) unless otherwise indicated. For questions 1 through 6, consider a bull money spread using the March 45/50 calls. 1. How much will the spread cost? a. $986 b. $302 c. $283 d. $193 e. none of the above 2. What is the maximum profit on the spread? a. $500 b. $802 c. $198 d. $302 e. none of the above 3. What is the maximum loss on the spread? a. $500 b. $698 c. $198 d. $802 e. none of the above 4. What is the profit if the stock price at expiration is $47? a. -$102 b. $398 c. -$302 d. $500 e. none of the above 5. What is the breakeven point? a. $48.02 b. $41.98 c. $55.66 d. $50.00 none of the above 6. Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50? a. $41 b. $198 c. $302 d. $102 e. none of the above For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. 7. What will be the cost of the butterfly spread? a. $1,195 b. $637 c. $79 d. $1,045 e. none of the above 8. What will be the profit if the stock price at expiration is $52.50? a. $171 b. $1,421 c. $1.037 d. $421 e. none of the above 9. Suppose you wish to construct a ratio spread using the March and June 50 calls. You want to buy 100 June 50 call contracts. How many March 50 calls would you sell? a. 105 b. 95 c. 100 d. 57 e. none