You could answer this question using your intuition for option pricing. 

When interest rates increase (with all else remaining the same), which of the following is true?  

An option-trading strategy has a gross payoff that is depicted by the purple line in the diagram below.

Which of the following describes the component legs of this option-trading strategy?

This question can be answered by using your intuition.

In the lecture, we constructed a long straddle on AAPL as follows:

• one long call with strike $170 at a premium of $8.94
• one long put with strike $170 at a premium of $10.52

A long straddle is "neutral" to the direction of AAPL price movements. The slope of the payoff diagram is the same in the positive and negative directions.

In contrast, a long strip is also an option-trading strategy that profits from a big price movement in either direction, but the profits are larger for down movements.

To see this, apply the calculations of the payoff table as instructed in Lecture 7 on the following long strip:

• one long call  with strike $170, with a premium of $8.94
• two long puts with strike $170, each with a premium of $10.52

what are the breakeven points for this long strip? That is, at what share price does the long strip have a zero net profit?

The spot exchange rate between Australian

dollars (AUD) and US Dollars (USD) is AUD 1.00 = USD 0.72. You believe that in

4 weeks time, the exchange rate will be AUD 1.00  = USD 0.69. Options are currently available

with a strike price of AUD 1.00 = USD 0.725.

Which option position is best suited to profit if

your speculation proves to be correct?

You are bullish on Twitter share price. In other words, you believe that TWTR will rise significantly in coming weeks.

What option position could you enter to profit from a correct bullish prediction?

Select as many answers as you think appropriate

A few weeks ago, you realised that you were

exposed to movements in the price of oil. At that time, you hedged this exposure by entering

a long put option written on oil.

The put option had a strike price of $90

per barrel. At the time of the option expiry, the spot price of oil is $105 per

barrel.

Hedging with options gives you a degree of

flexibility. What is the rational decision to make at expiry?

The S&P/ASX200 market index is currently 6800. You predict that the market will fall substantially in coming weeks and are prepared to speculate on this prediction.

You enter 40 long put options written on the S&P/ASX200 index. The options have a strike price of 6450.

On the expiry date of these options, the S&P/ASX200 index sits at 6500.

What is the gross payoff (in dollars) on your index option speculation?

Note that S&P/ASX200 index

options have a standard multiplier of $A10.  Do

Several months from now, you will make a large purchase

of lithium. As such, you are exposed to movements in the price of lithium between now and then.

You will hedge this exposure using an option

contract.

Which option position will best hedge you

against unfavourable movements in lithium price?