BAFI 356 – “Investments” all Semester, 2022
Homework Assignment #10 – Due Saturday. December 10
Each question is worth one (1) Point unless otherwise noted.
17points total
Chapter 19
Questions
1 Distinguish between a call and a warrant.
2 Explain the following terms used with puts and calls
a. Strike price
b. Naked option
c. Premium
d. Out-of-the-money call option
3 What role does the Options Clearing Corp play in the options market?
4 How can the writer of a call option cancel their obligation to sell stock?
5 What are the factors used in the Black-Scholes option valuation model. What is
the relationship between each factor and the option value?
6 Why do investors write calls? What are their obligations?
7 What is an index options? What index options are available (name at least
2)?
8 What are the major differences between a stock option and an index option?
9 How can a put be used to protect a particular position? A call?
10 How does writing a covered call differ from writing a naked call?
11 What is the maximum amount the buyer of an option can lose?
12 Suppose an investor purchases a call option on the S&P 500 Index with a strike price of
$4100. (2 points)
a. If at the expiration date the price of the S&P 500 Index is $4275, will the
investor exercise the call option; if so, what will the investor and the
writer of the call option receive?
b.
If at the expiration date the price of the S&P 500 Index is $4075,
will the investor exercise the call option; if so, what will the investor and
the writer of the call option receive?
13 Suppose an investor purchases a put option on the NASDAQ100 with a
strike price of $11500. (2 points)
c.
If at the expiration date the price of the NASDAQ 100 is $13100,
will the investor exercise the put option; if so, what will the investor
and the writer of the put option receive?
d. If at the expiration date the price of the NASDAQ 100 is $11000,
will the investor exercise the put option; if so, what will the
investor and the writer of the put option receive?
14. It is December 2, 2022. You bought 500 shares of lululemon athletica stock (LULU) at a
price of 280 in October 2022. Currently the market price is 382. The company reports earnings
in 6 days, on December 8th, and you fear the stock might suffer a short term dip. You want to
protect your gain in case a short term dip does not reverse. With the options pricing
information provided, how would you construct a costless collar? (2 points)

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