4.2 THE STRADDLE CONSISTS OF A LONG CALL AND A LONG PUT AT A...

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