1. Which statement is INCORRECT about a straddle?

a. long straddle has unlimited potential profit

c. Option traders short a straddle to bet on high volatility of stock returns

d. A straddle can be constructed by a long call and a long put

b. Option traders often buy a straddle to bet on risky future events affecting a company that can impact the stock price in either a positive or negative direction.

2.

• Current stock price S is $22.

• Time to maturity T is six months.

• Continuously compounded, risk-free interest rate r is 5 percent per year.

• European options prices are given in the following table:

  Strike Price	Call Price	Put Price
  K1 = $17.50	$5	$0.05
  K2 = 20	3	0.75
  K3 = 22.50	1.75	1.75
  K4 = 25	0.75	3.50

  Which statement is INCORRECT about a butterfly spread by going long calls with strike prices K₁ = $17.50 and K₃ = $22.50 and selling short two calls with a strike price 20.

Group of answer choices

The maximum loss is -0.75 if you long butterfly

You will make a profit when you long a butterfly spread and stock price changes very little

The maximum profit is 1.75 if you long butterfly

The loss could be unlimited if you long butterfly

3.

Which statement is CORRECT about arbitrage strategy about the following European call prices? The stock price is $40.

Strike Price	Expiration Month
	April	July	September
35	1	6	3
40	2	5	6

Group of answer choices

Calls with higher strike price should cost more.

The more time until expiration, the greater the call price. September calls should have higher price than July calls

The more time until expiration, the greater the call price. July calls should have higher price than September calls.

The more time until expiration, the lower the call price