PROBLEM SET 10 – SOLUTIONECO389 â?? SPRING 2017Corporate FinanceInstructor: Problem 1An option…

PROBLEM SET 10 – SOLUTIONECO389 – SPRING 2017Corporate FinanceInstructor: Problem 1An option that can be exercised only on its expiration date is called:A.B.C.D.E. A mix option.A European option.An American option.A call option.A put option. Problem 2The writer of a regular exchange-listed put-option on a stock:A. Has the right to buy 100 shares of the underlying stock at the marketprice.B. Has the right to sell 100 shares of the underlying stock at theexercise price.C. Has the obligation to buy 100 shares of the underlying stock at theexercise price.D. Has the obligation to sell 100 shares of the underlying stock at theexercise price.E. Has the obligation to buy 100 shares of the underlying stock at themarket price.Problem 3Suppose an investor have a put option. What will happen if the stockprice on the exercise date is below the exercise price?A.B.C.D.E. The seller will need to deliver stock to the owner of the option.The seller will be obliged to buy stock from the owner of the option.The owner will not exercise his option.The option will extend for nine more months.None of the above options. Problem 4A put option gives the owner the right:A.B.C.D.E. AndAndButButBut thethenotnotnot obligation to buy an asset at a given price.obligation to sell an asset at a given price.the obligation to buy or sell an asset at a given price.the obligation to buy an asset at a given price.the obligation to sell an asset at a given price. Problem 5Suppose an investor sells one share of stock and buys a call option onthe stock. What will be the value of her investment on the final exercisedate if the stock price is above the exercise price? (Ignore transactioncosts.)A.B.C.D.E. The value of two shares of stock.The value of one share of stock plus the exercise price.The exercise price.The value of one share of stock minus the exercise price.None of the above options. 1 Problem 6Buying the stock and the put option on the stock provides the same payoffas:A. Investing the present value of the exercise price in T-bills andbuying the call option on the stock.B. Short-selling the stock and buying a call option on the stock.C. Writing (selling) a put option and buying a call option on the stock.D. A T-bill.E. None of the above options.Problem 7Buying a call option, investing the present value of the exercise pricein T-bills, and short-selling the underlying share is the same as:A.B.C.D.E. Buying a call and a put.Buying a put and a share.Buying a put.Selling a call.None of the above options.Problem 8From a geometric viewpoint, how is the position diagram for a put optionrelated to the diagram of a call option on the same stock having thesame exercise price and maturity?A. The inverse of the call diagram.B. Unrelated to the call diagram no matter what the exercise price.C. The mirror image of the call diagram, reflected around the exerciseprice.D. Exactly the same as the call diagram for the given exercise price.E. The inverse of a protective call.Problem 9All else equal, as the underlying stock price decreases:A.B.C.D.E. The put price increases.The put price decreases.The call price increases.There is no effect on put price.The put price can either increase, decrease, or remain the same. Problem 10All else equal, as the underlying stock volatility decreases:A.B.C.D.E. The put price increases.The put price decreases.The call price increases.There is no effect on put price.The put price can either increase, decrease, or remain the same. 2