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# Derivatives Markets, 3e (McDonald) Chapter 3 Insurance, Collars, and Other Strategies 3.

## 1 Copyright 2013 Pearson Education, Inc.

5) A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is \$18.00 and the call premium is \$44.00. Interest rates are 0.5% per month. Determine the net profit or loss if the index price at expiration is \$830 (in 6 months). A) \$0 B) \$23.67 loss C) \$26.79 gain D) \$28.50 gain Answer: C 6) A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is \$18.00 and the call premium is \$44.00. Interest rates are 0.5% per month. What is the breakeven price of the market index for this strategy at expiration (in 6 months)? A) \$802.12 B) \$830.00 C) \$855.21 D) \$866.32 Answer: C sai p n 856.79 7) At the 6-month point, what is the breakeven index price for a strategy of longing the market index at a price of 830? Interest rates are 0.5% per month. A) \$802.12 B) \$830.00 C) \$855.21 D) \$866.32 Answer: C 8) The \$850 strike put premium is \$25.45 and the \$850 strike call is selling for \$30.51. Calculate the breakeven index price for a strategy employing a short call and long put that expires in 6 months. Interest rates are 0.5% per month. A) \$822.67 B) \$824.79 C) \$830.76 D) \$875.82 Answer: B 9) What is the maximum profit that an investor can obtain from a strategy employing a long 830 call and a short 850 call over 6 months? Interest rates are 0.5% per month. A) \$6.80 B) \$7.68 C) \$9.24 D) \$12.32 Answer: B

## 2 Copyright 2013 Pearson Education, Inc.

10) What is the maximum loss that an investor can obtain over 6 months from a strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month. A) \$6.80 B) \$7.68 C) \$9.24 D) \$12.32 Answer: D 11) What is the breakeven point that an investor can obtain from a 6-month strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month. A) \$832.82 B) \$842.32 C) \$852.22 D) \$862.92 Answer: B 12) The owner of a house worth \$180,000 purchases an insurance policy at the beginning of the year for a price of \$1,000. The deductible on the policy is \$5,000. If after 6 months the homeowner experiences a casualty loss valued at \$45,000, what is the homeowner's net gain/loss? Assume an opportunity cost of capital of 4.0% annually. A) \$0 B) \$1,000 C) \$5,000 D) \$6,020 Answer: D 13) Using option strategy concepts, what is the value of an insured home, if the value of the uninsured home is \$220,000, the house was purchased for \$180,000 and the house has a casualty policy costing \$500 with a \$2,000 deductible? Ignore interest costs. A) \$180,000 B) \$217,500 C) \$220,000 D) \$222,500 Answer: B 14) An investor purchases a call option with an exercise price of \$55 for \$2.60. The same investor sells a call on the same security with an exercise price of \$60 for \$1.40. At expiration, 3 months later, the stock price is \$56.75. All other things being equal and given an annual interest rate of 4.0%, what is the net profit or loss to the investor? A) \$1.21 loss B) \$1.50 loss C) \$0.54 gain D) \$1.65 gain Answer: C