Copenhagen Business School

FINANCE Corporate

Quiz 6

1)The value of an American call option is bounded by the following conditions:

1. • The call option is always worth at least the intrinsic value.
   • The call option is always worth more than the discounted exercise price.
   • The call option is always worth less than the underlying asset.
   • None of the above.
2. According to the Put-Call Parity you can replicate the payoff from a call option using the following instruments:
   • A put option with the same strike as the call and the underlying asset.
   • A put option with the same strike as the call, the underlying asset, and the risk free asset.
   • The underlying asset and the risk free asset.
   • None of the above.
3. The beta of a call option is:
   • Always equal to 0.
   • Not defined for a call option.

3. • Depends on the composition of the rest of your portfolio.
   • None of the above.
4. A putable bond is a bond where the bondholder has the right to demand early redemption, i.e. that the issuer repays the bond before maturity. How will the price of the putable bond compare to that of a straight bond with no embedded options from the same issuer?
   • It will never be optimal to redeem the bond early. Therefore the bonds will have the same price.
   • The putable bond is worth more than the straight bond because the holder might redeem the bond early.
   • The putable bond is worth less than the straight bond because the issuer dislikes early redemption.
   • None of the above.
5. Consider an American put option on a dividend paying stock. Could it be optimal to exercise this option before expiration?
   • Only if the dividend payment exceeds the intrinsic value.
   • Only if the current price of the American put is smaller than the price of an identical European put option.
   • Only if there is no planned dividend payments before the expiration of the option.
   • None of the above.
6. In a bull spread options strategy you buy a European call option with a strike at-the-money and then you sell a European call option with a strike which is out-of-the-money. When would this be a good strategy:
   • You expect the stock price not to move.
   • You expect the stock price to increase moderately.
   • You expect an extreme increase in the stock price.
   • None of the above.
7. The stock price is currently $100. A one-year American style put option has an exercise price of

$25 and is priced at $40. How can you make an arbitrage profit?

7. • You sell the put and keep $25 in reserve in case the buyer wants to exercise the put.
   • You sell the put, buy the share, and borrow $60 (at the risk free rate).
   • You sell the put, sell the share, and invest the proceeds in the risk free asset.
   • None of the above.
8. When is it optimal to exercise an in-the-money American call option on a non-dividend paying stock before expiration?
   • If you have an sudden need for cash.
   • If you expect the value of the underlying asset to decrease in the future.
   • It is never optimal to exercise before time.
   • None of the above.
9. When the standard deviation of the underlying asset increases then the European call option will also increase in value. What will happen to the value of the European put option?

(Hint: Look at the put-call-parity)

• • The put option will not change value.