Practice Questions
(Options)
1. These practice questions are a suplement to the problem sets, and are intended for those of you who want more practice. They are Optional, and are not part of the required material. 2. It is recommended that you look at these problems only after you fully understand how to solve the problem sets, the examples we covered in class, and the ones in the lecture notes.
3. Please note that I have collected these exmples from previous teaching material
I have had. As such, while in most cases the notation will match the one used in class, the match is not 100%.
4. Some of these questions are easier than the ones you are expected to know how to solve, while others are above the level of knowledge you are expected to show on quizes and the final.

ENJOY!

FIN 350

Practice Questions

2

1. (a) The risk-free rate per annum is 20% per year. European call options on the stock of XYZ
CORP with an exercise price of $35 and a maturity date 6 months hence are selling for $4.
XYZ CORP will pay no dividends during the next half year.
European put options with the same maturity date and exercise price are selling for 67/. c c(35) = $4.

p(35) = $0.67 .

Short-sales of stock are strictly illegal. Use a Payoff Table to show how you can replicate the payoff in 6 months time from short-selling 5 shares today.
(b) Suppose the stock of XYZ CORP is presently selling for $32. Use a Payoff Table to show how you can make an arbitrage profit. You can buy XYZ’s stock.
(c) Now suppose you can not trade in the stock of XYZ CORP at all, but you can still trade in options. Suppose European put and call options on XYZ CORP stock with a maturity date 6 months hence and an exercise price of $45 are selling for $7 and $1.50 respectively. c(35) = $4

c(45) = $1.50

p(35) = $0.67

p(45) = $7.

Use the Put Call Parity relation and a