Exercise
Answer the following questions.
- 1. The holder of a call option can expect to receive all of the following potential benefits except:
- A. The potential for unlimited profits
- B. A premium
- C. A right to exercise on demand
- D. Limited risk
- 2. The soybeans futures contract is quoted in cents per bushel. Which of the following prices is the lowest possible price that a soybean 980’0 call @ 40 would be in the money?
- A. $9.78
- B. $9.82
- C. $9.30
- D. $10.30
- 3. A corn futures contract contains 5,000 bushels and is quoted in cents per bushel September corn futures is currently trading at 420, and your customer has just written a Sep Corn 400 Put @ 20. What is the maximum amount your customer could lose on this option?
- A. $19,000
- B. $20,000
- C. $1,000
- D. Unlimited
- 4. Which of the following options is out of the money?
- A. Jul Corn 380 call, July corn is trading @ 400
- B. Dec Corn 420 call, December corn is trading @ 420
- C. Mar Corn 430 put, March corn is trading @ 460
- D. Sep Corn 410 put, September corn is trading @ 400
- 5. A sugar futures contract contains 112,000 pounds of sugar and is quoted in cents per pound. Sylvia buys 10 contracts of this option: May Sugar 13.50 put @ 0.6. Two months later, the underlying stock is trading at 12.50. Could she exercise her contracts profitably? What would be her profit or loss?
- A. Yes; $11,200
- B. Yes; $4,480
- C. No; $672
- D. No; $11,200
Answers
- 1. B. The holder of an option has bought an option’s rights. As purchaser, an investor pays the premium. The premium is the most she can lose, so her risk is limited. Option holders also have the right to exercise the contract on demand. The holder of a call option has the potential for unlimited profits as the value of the underlying stock increases.
- 2. B. When a contract is “in the money” it means the contract has value if it is sold. It does not necessarily mean the