Section 2.4.2
The straddle consists of a long call and a long put at a strike price of $1,125. The
maximum loss occurs when the index is at $1,125, when the call and put are at the
money. The maximum loss = Call premium + Put premium = $80.50 + $48.00 = $128.50.
Per the contract, the loss is $100 × $128.50 = $12,850.
4.) The expected volatility of the S&P 500, relative to market expectations, is least likely to
be a factor in the decision to implement:
A. Strategy A.
B. Strategy C.
C. Strategy B.
Answer = B
"Risk Management Applications of Option Strategies," Don M. Chance
Sections 2.3.3, 2.4.1, 2.4.2
Strategy C is a collar, which is a directional strategy; that is, its performance is
dependent on the direction of the movement of the underlying (in this instance, the
S&P 500). The performance of Strategy A (butterfly spread) and Strategy B (straddle) are
based on the expected volatility (relative to the rest of the market) of the S&P 500.
5.) Based on Silva's advice, the effective annual interest rate for First Citizen Bank's loan is
closest to:
A. 5.75%.
B. 4.56%.
C. 6.38%.
Answer = C
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