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a. exercise b. offset e. expiring out-of-the-money d. buying a put e none of the above 12. An investor who exercises a call option on an index must a. accept the cash difference between the index and the exercise price b. b. purchase all of the stocks in the index in their appropriate proportions from the writer c immediately buy a put option to offset the call option d. immediately write another call option to offset e. none of the above 13. What amount must a call writer pay if a cash-settled index call is exercised? a. difference between the index level and the exercise price b. exercise price c. difference between the exercise price and the index level d. index level e. none of the above 14. All of the options on Microsoft comprise an option class. 15. The bid price is the price paid to buy an option from a market maker. 16. The number of option contracts outstanding at any given time is called the open interest. 17. On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text? a. b. c, d. 5.8 % 5.9 % 6.1% 6.2 % none of the above e. 18. Suppose you use put-call parity to compute a European call price from the European put price, the stock price, and the risk-free rate. You find the market price of the call to be less than the price given by put-call parity. Ignoring transaction costs, what trades should you do? a. buy the call and the risk-free bonds and sell the put and the stock b. buy the stock and the risk-free bonds and sell the put and the call c. buy the put and the stock and sell the risk-free bonds and the call d. buy the put and the call and sell the risk-free bonds and the stock e. none of the above

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