Corporate Finance · End Term · Jan 2025 · AN

**1. Explain diversification:** Portfolio risk depends on both the individual asset risks and how their returns move together. For two assets, \[\sigma_p^2=w_A^2\sigma_A^2+w_B^2\sigma_B^2+2w_Aw_B\rho\sigma_A\sigma_B.\] **2. Apply opposite movement:** Negative correlation makes the covariance term negative for positive weights, reducing portfolio variance. With perfect negative correlation and suitable weights, risks can offset completely. **Answer: A — TRUE.** A: **Correct:** Opposite movements offset fluctuations and improve diversification. B: **Incorrect:** This rejects the risk-reduction effect of negative correlation.

**1. Define market beta:** \[\beta_i=\frac{\operatorname{Cov}(R_i,R_M)}{\operatorname{Var}(R_M)}.\] It measures the asset’s sensitivity to market-return movements. **2. Interpret a negative value:** Market variance is positive, so negative beta means negative covariance. The project tends to move against the market: a below-average market return is associated with an above-average project return, and vice versa. This is a tendency rather than a guarantee in every period. **Answer: A — TRUE.** A: **Correct:** Negative market exposure indicates an opposite-direction tendency. B: **Incorrect:** A negative beta does not indicate the usual same-direction market exposure.

**1. Explain systematic exposure:** A higher positive beta means greater exposure to market-wide risk, which investors generally cannot remove by ordinary diversification. **2. Connect required return and price:** Under CAPM with a positive market premium, higher beta requires a higher expected return. Holding expected future cash flows fixed, a higher required discount rate produces a lower present value, not a higher one. **Answer: B — FALSE.** A: **Incorrect:** It reverses the usual price effect of a higher required return for unchanged future payoffs. B: **Correct:** With other payoff characteristics fixed, higher systematic risk normally lowers the price a risk-averse investor is willing to pay.

**1. State CAPM:** \[E[R_i]-r_f=\beta_i\big(E[R_M]-r_f\big).\] Here r_f is the risk-free rate and the market excess return is the compensation per unit of market exposure. **2. Interpret the risk premium:** The premium is proportional to beta, which measures systematic risk. Firm-specific risk can be diversified away and has no separate premium in the CAPM equilibrium. **Answer: A — TRUE.** A: **Correct:** The formula prices beta exposure rather than diversifiable firm-specific volatility. B: **Incorrect:** This would incorrectly imply that CAPM pays an independent premium for diversifiable risk.

**1. Identify the axes:** The security market line uses beta on the horizontal axis and expected return on the vertical axis. **2. Write its equation:** \[E[R_i]=r_f+\beta_i(E[R_M]-r_f).\] Its intercept is r_f and its slope is the market risk premium. It differs from a capital allocation line, whose horizontal axis is standard deviation. **Answer: A — TRUE.** A: **Correct:** The stated expected-return-versus-beta relationship is exactly the security market line. B: **Incorrect:** The statement correctly identifies both quantities plotted.

**1. Interpret the line:** The security market line gives the required expected return for each beta under CAPM. **2. Analyze overpricing:** At an excessively high current price, the asset’s given expected future payoff produces too low an expected return. It therefore has a negative return gap relative to the required return for its beta and lies below the security market line. **Answer: A — TRUE.** A: **Correct:** A below-line expected return is insufficient compensation for the asset’s beta, indicating overpricing in the CAPM comparison. B: **Incorrect:** An underpriced security would instead offer an above-line expected return, holding the expected payoff and beta fixed.

**1. Explain informational efficiency:** The efficient-market hypothesis states that market prices incorporate the information set relevant to the stated form of efficiency. **2. Interpret the wording:** Weak-form efficiency concerns past market data, semi-strong efficiency includes public information, and strong-form efficiency includes all information. The general statement that prices reflect available information captures the hypothesis, with the information set needing qualification. **Answer: A — TRUE.** **Convention note:** The phrase all available information corresponds to the strongest information set if it includes private information. The hypothesis has distinct weak, semi-strong and strong forms; it is not a guarantee of perfect prediction. A: **Correct:** Reflecting available information in prices is the central informational-efficiency idea. B: **Incorrect:** This rejects the basic definition of informational efficiency.

**1. Define intrinsic call value:** For stock price S and strike K, immediate-exercise value is \[\max(S-K,0).\] **2. Apply at-the-money status:** At the money means S = K, so intrinsic value is \(\max(0,0)=0\). The option can still have a positive market premium because time value is distinct from intrinsic value. **Answer: A — TRUE.** A: **Correct:** At S = K the immediate-exercise payoff is zero. B: **Incorrect:** Positive time value does not make intrinsic value positive at the money.

**1. Recall the put right:** A put permits sale of the underlying at strike K. Its terminal payoff is \(\max(K-S_T,0)\). **2. Vary the stock price:** A higher stock price reduces the advantage of selling at K. Holding other inputs fixed, a standard put’s value decreases or stays unchanged as the stock price rises. **Answer: B — FALSE.** A: **Incorrect:** It gives the opposite of the ordinary put price response. B: **Correct:** A put benefits from lower underlying prices, not higher ones.

**1. Define delta:** Delta is the change in option price for a small increase in the underlying stock price: \(\Delta=\partial V/\partial S\). **2. Compare calls and puts:** A standard call benefits from a higher stock price and has nonnegative delta, typically between 0 and 1. A standard put loses value as stock price rises and has nonpositive delta, typically between -1 and 0. The statement reverses these signs. **Answer: B — FALSE.** A: **Incorrect:** The stated call and put delta signs are reversed. B: **Correct:** Calls normally have positive delta and puts negative delta.

**1. Distinguish a right from an obligation:** A call holder buys the right to purchase the underlying at the strike. The holder can decline to exercise when exercise is unattractive. **2. Identify the obligated party:** The call writer must fulfill the contractual sale if the holder validly exercises. The exercise dates also depend on whether the option is American or European. **Answer: B — FALSE.** A: **Incorrect:** It assigns an obligation to the holder, who instead owns the exercise right. B: **Correct:** The holder has a right, while the writer bears the corresponding obligation.

**1. Compare exercise styles:** A European option can be exercised only at its expiration date. An American option can be exercised on eligible dates up to expiration. **2. Apply the distinction:** The ability to exercise before expiration belongs to American-style exercise, so the statement about a European option is false. Selling a European option before expiration is different from exercising it. **Answer: B — FALSE.** A: **Incorrect:** The European exercise right does not allow early exercise. B: **Correct:** European options are exercised only at expiration; earlier secondary-market sale is a separate action.

**1. State the three objectives:** The financial trilemma concerns financial stability, national autonomy over financial safeguards, and international financial integration/free capital mobility. **2. Explain the tension:** Cross-border financial activity can transmit risks beyond one national regulator’s reach. Complete national policy autonomy and unrestricted financial integration therefore constrain the ability to ensure stability simultaneously. **3. Match the statement:** It correctly states the incompatibility of fully attaining all three objectives together. **Answer: A — TRUE.** A: **Correct:** These are the three objectives of the financial-stability trilemma. B: **Incorrect:** The statement accurately describes that trilemma, distinct from the monetary-policy impossible trinity.

**1. Define safety in the simplified model:** A risk-free payoff is the same known amount across the modeled future states. Its absence of state-dependent variation is what removes payoff uncertainty. **2. Compare the statement:** Different payoffs across future scenarios describe risky state-dependent returns rather than the defining feature of a safe asset. **Answer: B — FALSE.** **Convention note:** Safety is relative to the model, currency and horizon; a nominally fixed payoff can still face inflation or default risk outside simplified assumptions. A: **Incorrect:** Different state-contingent payoffs do not define a risk-free asset. B: **Correct:** The defining safe-payoff feature is constancy across the relevant states.

**1. Define excess return:** Excess return is asset return minus the risk-free return. The Sharpe ratio is \[\mathrm{SR}=\frac{E[R]-r_f}{\sigma(R-r_f)}.\] **2. Identify the missing adjustment:** The statement puts total expected asset return in the numerator. It omits subtracting the risk-free benchmark, so it is not the general definition. **3. Clarify the denominator:** When r_f is constant, \(\sigma(R-r_f)=\sigma(R)\), but that does not remove the required subtraction in the numerator. **Answer: B — FALSE.** A: **Incorrect:** It omits the risk-free rate from the numerator. B: **Correct:** The numerator must be expected excess return, not unadjusted expected return.

**1. State the capital allocation line:** Combining a risky asset with a risk-free asset gives \[E[R_p]=r_f+\frac{E[R]-r_f}{\sigma}\sigma_p.\] Its slope is the risky asset’s excess return per unit of standard deviation. **2. Substitute the values:** \[\text{slope}=\frac{0.15-0.04}{0.10}=\frac{0.11}{0.10}=1.1.\] The positive sign follows because the risky expected return exceeds the risk-free rate. **Answer: B — 1.1.** A: **Incorrect:** 1.5 uses total return and fails to subtract the risk-free rate. B: **Correct:** The excess return 11% divided by 10% risk equals 1.1. C: **Incorrect:** 1.0 is not the specified excess-return-to-risk ratio. D: **Incorrect:** 0.4 is the risk-free rate divided by risk, not the allocation-line slope.

**1. Apply present-value discounting:** A payment C_t received t years from now is worth \(C_t/(1+r)^t\) today. Discount each payment to the same date before adding. **2. Substitute the three cash flows:** \[PV=\frac{5000}{1.10}+\frac{10000}{1.10^2}+\frac{20000}{1.10^3}.\] **3. Calculate and round:** The contributions are 4545.45, 8264.46 and 15026.30 rupees. Their sum is 27836.21 rupees, which rounds to Rs 27,836. Paying more would produce a negative net present value at the stated 10% required return. **Answer: B — Rs 27,836.** A: **Incorrect:** 35,000 adds the future payments without discounting. B: **Correct:** The discounted cash-flow sum rounds to 27,836. C: **Incorrect:** 24,174 is not the sum at the specified rate and timing. D: **Incorrect:** 20,000 counts neither the earlier payments nor the correct discounted total.

**1. Specify the exchange-rate convention:** Let q be the value of one Thai baht in Chinese yuan. Under the uncovered interest-parity calculation intended here, the higher-interest currency is expected to depreciate. **2. Equalize expected returns:** Starting with one baht, the Thai deposit becomes 1.09 baht. A yuan deposit earns 1.04 times its initial yuan value. Hence \[\frac{E[q_1]}{q_0}=\frac{1.04}{1.09}.\] **3. Compute appreciation:** \[\frac{E[q_1]-q_0}{q_0}=\frac{1.04}{1.09}-1=-0.0458716\approx-4.59\%.\] A negative appreciation rate means expected baht depreciation in this quotation. **Answer: A — -4.59%.** **Convention note:** Interest rates alone do not determine an unconditional real-world exchange-rate forecast. This calculation assumes uncovered interest parity and quotes CNY per THB; reversing the quote changes both the sign and exact percentage. A: **Correct:** This is the interest-parity change in the yuan value of one baht. B: **Incorrect:** -2.85% does not follow from the ratio of the given gross interest rates. C: **Incorrect:** The sign is wrong for the specified quotation under interest parity. D: **Incorrect:** It reverses the sign of the calculated baht appreciation rate.

**1. Use European put-call parity:** For a non-dividend-paying stock and continuous risk-free rate r, \[C+Ke^{-rT}=P+S_0.\] Thus \(P=C+Ke^{-rT}-S_0\). **2. Substitute the inputs:** Here C = 15, K = 120, r = 0.08, T = 1 and S₀ = 115. The discounted strike is \(120e^{-0.08}=110.77396\). **3. Calculate the put price:** \[P=15+110.77396-115=10.77396\approx\text{Rs }10.77.\] **Answer: C — Rs 10.77.** A: **Incorrect:** 2.45 does not satisfy the parity equality with the supplied inputs. B: **Incorrect:** 6.24 does not satisfy the specified European parity relation. C: **Correct:** The discounted-strike parity calculation gives 10.77. D: **Incorrect:** 16.37 is not the parity-implied price.

**1. Use put delta:** In the standard non-dividend Black–Scholes model, \[\Delta_{\mathrm{put}}=N(d_1)-1.\] Delta approximates the option-price change for a small unit change in the stock price. **2. Substitute the given N(d₁):** \(\Delta_{\mathrm{put}}=0.4-1=-0.6\). For \(\Delta S=1\), the first-order change is \[\Delta P\approx\Delta_{\mathrm{put}}\Delta S=-0.6\text{ rupees}.\] **3. Interpret the sign:** The put price decreases by approximately Rs 0.60. N(d₂) is not the stock-price delta input. **Answer: C — The put option price decreases by Rs 0.6..** **Convention note:** This is a local delta approximation, not an exact finite-move repricing. The supplied N(d₂) = 0.7 exceeds N(d₁) = 0.4, inconsistent with the usual positive-volatility Black–Scholes ordering d₁ > d₂; the requested delta still follows formally from the stated N(d₁). A: **Incorrect:** A put does not normally increase one-for-one when the stock rises. B: **Incorrect:** The magnitude matches the delta calculation but its sign is reversed. C: **Correct:** The first-order change is -0.6 for a stock increase of 1. D: **Incorrect:** This uses N(d₁) directly rather than N(d₁) - 1.

**1. Use portfolio beta:** Beta is linear in portfolio weights, so a company’s asset beta is the asset-value-weighted average of its divisional betas under the given aggregation. **2. Substitute the shares:** \[\beta=0.70(1.2)+0.30(1.8)=0.84+0.54=1.38.\] The weights sum to 1, and the result lies between 1.2 and 1.8 as expected. **Answer: B — 1.38.** A: **Incorrect:** 1.08 is below both component betas despite positive weights. B: **Correct:** The weighted sum is 1.38. C: **Incorrect:** 1.58 does not use the specified 70%/30% weights. D: **Incorrect:** 1.88 exceeds both component betas and cannot be their positive-weight average.

**1. State CAPM:** \[E[R_X]=r_f+\beta_X(E[R_M]-r_f).\] Here beta multiplies the market excess return, not the total market return. **2. Compute the premium:** \(E[R_M]-r_f=10\%-2\%=8\%\). Multiplying by beta 1.5 gives \(1.5\times8\%=12\%\). **3. Add the risk-free return:** \(E[R_X]=2\%+12\%=14\%\). **Answer: C — 14%.** A: **Incorrect:** 8% is the market premium before scaling and adding the risk-free return. B: **Incorrect:** 10% is the market return, appropriate to beta 1 rather than 1.5. C: **Correct:** The CAPM calculation gives 14%. D: **Incorrect:** 18% does not follow from the given market premium and beta.

**1. Rearrange the Sharpe ratio:** \[\mathrm{SR}=\frac{E[R]-r_f}{\sigma}\quad\Longrightarrow\quad r_f=E[R]-\mathrm{SR}\sigma.\] **2. Substitute the data:** \[r_f=0.12-(0.5)(0.20)=0.12-0.10=0.02=2\%.\] Checking gives \((12\%-2\%)/20\%=0.5\). **Answer: A — 2%.** A: **Correct:** 2% reproduces the stated Sharpe ratio. B: **Incorrect:** 4% would give a Sharpe ratio of 0.4. C: **Incorrect:** 6% would give a Sharpe ratio of 0.3. D: **Incorrect:** 8% would give a Sharpe ratio of 0.2.

**1. Identify the initial cost:** Buying the call and put costs \(2+1=3\) rupees in total. **2. Calculate expiry payoffs:** At S_T = 25 and K = 20, the call pays \(\max(25-20,0)=5\). The put pays \(\max(20-25,0)=0\). **3. Deduct the premiums:** \[\text{profit}=5+0-3=\text{Rs }2.\] The initial stock price does not enter these option payoffs once the final price and strike are specified. **Answer: D — If you purchase one call option and one put option, then you make a profit of .** **Convention note:** As intended by the problem, profit excludes transaction costs and financing/interest on the premiums. A: **Incorrect:** 5 is the gross payoff before deducting both option premiums. B: **Incorrect:** 4 fails to deduct the full combined cost of 3. C: **Incorrect:** 3 is the initial total premium, not the profit. D: **Correct:** The total expiry payoff 5 minus total premium 3 gives 2.

**1. Identify both positions:** A long stock position owns the underlying shares. Writing a call creates an obligation to sell those shares at the strike if the option is exercised. **2. Explain the coverage:** The owned shares cover that delivery obligation. The combined strategy is therefore called a covered call; it receives option premium while limiting upside above the strike. **Answer: A — Covered call.** A: **Correct:** Long stock plus short call is the definition of a covered call. B: **Incorrect:** A protective put combines long stock with a purchased put. C: **Incorrect:** A standard long straddle buys a call and a put at the same strike and expiry. D: **Incorrect:** A standard long strip buys one call and two puts, not stock plus a written call.

**1. Compute the required CAPM return:** \[r_{\mathrm{CAPM}}=6\%+1.6(10\%-6\%)=6\%+6.4\%=12.4\%.\] **2. Compare the assessed return:** Your expected return is 12%. Its alpha relative to CAPM is \[\alpha=12\%-12.4\%=-0.4\%.\] **3. Interpret the pricing gap:** The expected return is too low for the stock’s beta. Relative to this CAPM benchmark and your cash-flow expectations, the current price is too high. **Answer: A, D — Akola Inc stock is overpriced.; Akola Inc has an alpha of -0.4%..** A: **Correct:** The expected return lies below the required return, indicating overpricing in this comparison. B: **Incorrect:** Underpricing would produce a positive rather than negative alpha. C: **Incorrect:** The alpha magnitude is 0.4 percentage points but its sign is negative. D: **Correct:** 12% minus 12.4% gives alpha -0.4%.

**1. Calculate market beta:** \[\beta=\rho\frac{\sigma_i}{\sigma_M}=0.5\frac{0.15}{0.05}=1.5.\] **2. Use the stated market change:** The market return of 8% is 2 percentage points above its expected 6%. In the linear market-model prediction, Cisco’s corresponding conditional increment is \(1.5\times2\%=3\%\). **3. Add the expected asset return:** \[\widehat R_i=10\%+1.5(8\%-6\%)=13\%.\] This is a model prediction, not a guaranteed realized return. **Answer: A, C — The market beta of Cisco Inc. is 1.5.; If the market returns a rate of return of 8%, then one would expect Cisco Inc. .** **Convention note:** Beta alone specifies a linear projection coefficient; the conditional-return interpretation assumes the usual linear market model with zero conditional residual mean. A: **Correct:** The correlation-adjusted volatility ratio gives 1.5. B: **Incorrect:** 3 is the volatility ratio before multiplying by correlation 0.5. C: **Correct:** Under the linear market-model prediction, the expected increment is 3 points, giving 13%. D: **Incorrect:** 16% uses the unadjusted volatility ratio and ignores the correlation factor.

**1. Write the purchased put’s net profit:** With strike K = 48 and premium 5, \[\Pi(S_T)=\max(48-S_T,0)-5.\] **2. Find the break-even level:** Positive profit requires \(48-S_T>5\), hence \(S_T<43\). At exactly 43 the net profit is zero. **3. Evaluate the candidates:** Prices 30 and 40 yield profits 13 and 3 respectively. At 50 or 60 the put expires worthless, leaving a loss equal to the premium, 5. **Answer: A, B — Rs 30; Rs 40.** **Convention note:** The listed stock prices are interpreted as expiry prices, with transaction and premium-financing costs ignored. A: **Correct:** The payoff is 18 and net profit is 13. B: **Correct:** The payoff is 8 and net profit is 3. C: **Incorrect:** The put expires worthless, so net profit is -5. D: **Incorrect:** The put expires worthless, so net profit is -5.

**1. State parity:** For European options on the same non-dividend-paying stock with equal strike and expiry, \[C+PV(K)=P+S_0.\] Both sides replicate the same terminal payoff. **2. Rearrange for the put:** \[P=C+PV(K)-S_0.\] **3. Rearrange for the call:** \[C=P+S_0-PV(K).\] These rearrangements establish A and D. **Answer: A, D — The price of a European put option must equal the European call option price ; The price of a European call option must equal the European put option price .** **Convention note:** For dividend-paying stocks the stock component must be adjusted for dividends; the standard non-dividend version is intended here. A: **Correct:** It correctly isolates P from the parity equation. B: **Incorrect:** The stock and discounted-strike signs are reversed. C: **Incorrect:** The stock and discounted-strike signs are reversed in the expression for P. D: **Correct:** It correctly isolates C from the parity equation.

**1. Recall the put payoff:** A put pays \(\max(K-S_T,0)\). Holding other inputs fixed, a higher strike increases the possible sale price guaranteed by the option. **2. Explain volatility:** The option payoff is convex: downside in the stock creates larger put payoffs, while sufficiently high stock prices merely produce zero payoff. Under the standard option model, higher volatility increases put value. **3. Compare stock price and interest:** A higher stock price reduces put value. For a standard European put on a non-dividend-paying stock, a higher interest rate reduces the present value of the strike and lowers put value. **Answer: B, C — Exercise price; Volatility of stock price.** **Convention note:** The usual European/non-dividend option comparison is intended. American-option exercise effects require additional qualifications. A: **Incorrect:** A higher stock price generally reduces a put’s value. B: **Correct:** A higher exercise price improves the holder’s sale right. C: **Correct:** Higher volatility increases the value of the convex put payoff in the standard model. D: **Incorrect:** In the standard European model, higher rates reduce put value rather than increase it.

**1. Compute the terminal call payoffs:** At stock prices 70 and 50 with strike 65, the call pays C_u = 5 and C_d = 0. **2. Compute the hedge ratio:** \[\Delta=\frac{C_u-C_d}{S_u-S_d}=\frac{5-0}{70-50}=0.25.\] One call has the same two-state stock sensitivity as one quarter of a share. **3. Hedge one long share:** To offset a long share’s unit stock sensitivity, write \(1/0.25=4\) calls. This gives net sensitivity \(1-4(0.25)=0\). **4. Check the quoted premium:** With zero interest, the risk-neutral up probability is \((60-50)/(70-50)=0.5\), so the no-arbitrage call price would be \(0.5(5)=2.5\), not the quoted 5. This inconsistency does not change the terminal payoff hedge ratio. **Answer: A, C — The hedge ratio for the given call option is 0.25.; The purchase of one share can be hedged with 4 call options..** **Convention note:** The quoted call premium violates the stated one-period no-arbitrage model. Hedge counts follow the terminal payoff differences; the calls must be short to hedge a long share. A: **Correct:** The two-state payoff difference gives delta 0.25. B: **Incorrect:** The stated 0.5 sensitivity is twice the computed hedge ratio. C: **Correct:** A long share is hedged by writing four calls, since 4 × 0.25 = 1. D: **Incorrect:** Two calls offset only 0.5 of the share sensitivity.

**1. Use the six-month risk-free growth:** The supplied six-month return is 2%, so one period’s gross growth factor is 1.02, without annualizing it. **2. Solve the risk-neutral probability:** \[q=\frac{1.02S_0-S_d}{S_u-S_d}=\frac{102-90}{120-90}=\frac{12}{30}=0.40.\] **3. Discount the expected call payoff:** At strike 110, the two payoffs are 10 and 0. Thus \[C_0=\frac{0.40(10)+0.60(0)}{1.02}=3.9215686\approx\text{Rs }3.92.\] **Answer: A, C — The risk-neutral probability that stock price increases is 40%.; According to risk-neutral approach, the price of call option is Rs 3.92..** A: **Correct:** The pricing probability of the up state is 40%. B: **Incorrect:** 60% is the risk-neutral down-state probability. C: **Correct:** The discounted risk-neutral payoff equals 3.92. D: **Incorrect:** 5.88 uses the wrong up-state probability.

**1. Apply the Gordon growth model:** For next-year dividend D₁, required return r and constant growth g with r > g, \[P^*=\frac{D_1}{r-g}.\] **2. Calculate the model value:** \[P^*=\frac{25}{0.08-0.03}=\frac{25}{0.05}=\text{Rs }500.\] **3. Compare with the quoted price:** The market price 600 exceeds the model value by 100. Under the problem’s assumptions, the stock is overpriced; the model-based action among the choices is to sell rather than buy. **Answer: B, D — HCL stock is overpriced.; An investor should sell HCL shares..** A: **Incorrect:** The current price exceeds, rather than falls below, the computed value. B: **Correct:** 600 is greater than the model value 500. C: **Incorrect:** The model does not support buying at a price above its computed value. D: **Correct:** Selling is the textbook implication of the stated overvaluation under the supplied model.

**1. Write the moneyness conditions:** For common strike K, a call is in the money when S > K and a put is in the money when S < K. At the money means S = K for both. **2. Compare the paired options:** If the call is in the money, the same-strike put is out of the money. If either is at the money, equality makes the other at the money as well. **Answer: B, C — If the call option is in the money, the put option will be out of the money.; If the put option is at the money, the call option will also be at the money..** A: **Incorrect:** If the put is in the money, S < K, so the call is out of the money. B: **Correct:** S > K makes the call in the money and the put out of the money. C: **Correct:** S = K makes both options at the money. D: **Incorrect:** When the call is at the money, the put is also at the money rather than out of the money.