Options (Practice Problems) PDF

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1. Suppose that a March call option with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? [a) If the spot price exceeds $52.5 b) If the spot price is greater than strike price] 2. Suppose that a June put option with a strike price of $60 costs $4 and is held until June.

Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? [a) If the spot price is less than $56 b) If the spot price is less than the strike price] 3. Assume you have a call option on a stock with a strike price of 150. The option price is 12. Identify the profit / loss in the following cases: a. If the market price at maturity is 170 [Exercise, +8] b. If the market price at maturity is 162 [Exercise, Break-even] c. If the market price at maturity is 138 [Not Exercise, -12] d. If the market price at maturity is 120 [Not Exercise, -12] e. If the market price at maturity is 185 [Exercise, +23] For Seller of the option:

[-8] [+12] [+12] [+12] [-23] 4. Assume an investor buys a put option at a price of $4 on one unit of Asset X with one month to maturity and an exercise price of $400. Identify the profit and loss in each of the following scenarios. Write down the amount of profit/loss for each of the following. Also make a graph of it. a. If the asset’s price at the end of maturity is greater than $400 [Not Exercise] b. If the asset’s price at the end of maturity is equal to $404 [Not Exercise, Break-

even] c. If the asset’s price at the end of maturity is less than $400 [Indifferent, -4] a. If the asset’s price at the end of maturity is greater than $400 but less than 402 [Not

Exercise] 5. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80, and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option? [(1.8 – 1.59) – 0.04] x 31250 6. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mike’s net profit on the call option?

[(0.76 – 0.82) + 0.01] x 50000 7. Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian’s net profit on the put option? [(0.72 – 0.75) + 0.03] x 50000...