CHAPTER 1

Introduction

Practice Questions

Problem 1.8.

Suppose you own 5,000 shares that are worth 25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months?

You should buy 50 put option contracts (each on 100 shares) with a strike price of 25 and an expiration date in four months. If at the end of four months the stock price proves to be less than 25, you can exercise the options and sell the shares for 25 each.

Problem 1.9.

A stock when it is first issued provides funds for a company. Is the same true of an exchange-traded stock option? Discuss.

An exchange-traded stock option provides no funds for the company. It is a security sold by one investor to another. The company is not involved. By...