Exam 3: Insurance, collars, and Other Strategies

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A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,what is the estimated price of a call option with an exercise price of $830?

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A

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.

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D

Why is a straddle position considered a speculation on the asset's volatility?

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The strategy loses money if prices stay constant,but benefits from large changes in prices,either up or down.

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.

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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.

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Explain how a long stock and long put strategy equals the cash flow from a long call strategy.

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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.

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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?

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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).

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A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,what is the profit or loss at expiration (in 6 months)if the market index is $810?

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What is the difference between naked and covered call writing?

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What are the similarities and differences between bear and bull spreads?

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A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,compute the profit or loss from the long put position by itself (in 6 months)if the market index is $810.

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A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,compute the profit or loss from the long index position by itself expiration (in 6 months)if the market index is $810.

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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)?

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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.

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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.

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Why might the manager of a portfolio employ a protective put strategy?

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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.

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Compare the butterfly spread,bear spread,bull spread,covered call,straddle,and other strategies.Is any one strategy better than another? Are there trade-offs between each that is almost perfect or do significant advantages exist from one strategy to another?

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