Chapter 15 Options Markets

Chapter 15 - Options Markets

Chapter 15

Options Markets

Multiple Choice Questions

1.You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$200 profitB.$200 lossC.$300 profitD.$300 loss

2.You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$200 profitB.$200 lossC.$500 profitD.$500 loss

3.You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$300 profitB.$300 lossC.$500 lossD.$200 profit

4.You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $121 per share. You will realize a ______ on the investment.A.$300 profitB.$200 lossC.$600 lossD.$200 profit

5.A(n) ______ option can only be exercised on the expiration date.A.MexicanB.AsianC.AmericanD.European

6.All else the same, an ______ style option will be ______ valuable than a ______ style option.A.American, more, EuropeanB.American, less, EuropeanC.American, more, CanadianD.American, less, Canadian

7.At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.A.Max(0, ST - X)B.Min(0, ST - X)C.Max(0, X - ST)D.Min(0, X - ST)

8.At contract maturity the value of a put option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.A.Max(0, ST - X)B.Min(0, ST - X)C.Max(0, X - ST)D.Min(0, X - ST)

9.An American put option gives its holder the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

10.An Asian call option gives its holder the right to ____________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at a price determined by the average stock price during some specified portion of the option's lifeC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11.An Asian put option gives its holder the right to ____________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at a price determined by the average stock price during some specified portion of the option's lifeC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12.A down-and-out option _______________.A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termB.provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionC.expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termD.expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

13.A down-and-in option _______________.A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termB.provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionC.expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termD.expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

14.A quanto provides its holder with ______________.A.the right to participate in the payoffs from a portfolio of gambling casino stocksB.the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rateC.the right to participate in the investment performance of a foreign securityD.the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.You purchase a call option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and C0 is the original purchase price of the option.A.Max(-C0, ST - X - C0)B.Min(-C0, ST - X - C0)C.Max(C0, ST - X + C0)D.Max(0, ST - X - C0)

16.A lookback option provides its holder with _______________.A.a payoff determined by either the maximum or minimum price of the underlying stock during the life of the optionB.a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the optionC.a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionD.a payoff based on the average price of the underlying stock over the life of the option

17.You write a put option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and P0 is the original premium of the put option.A.Max(P0, X - ST - P0)B.Min(-P0, X - ST - P0)C.Min(P0, ST - X + P0)D.Max(0, ST - X - P0)

18.Longer term American style options with maturities of up to three years are called __________.A.warrantsB.LEAPSC.GICsD.CATs

19.The initial maturities of most exchange traded options are generally __________.A.less than a yearB.less than 2 yearsC.between 1 and 2 yearsD.between 1 and 3 years

20.A futures call option provides its holder with the right to ___________.A.purchase a particular stock at some time in the future at a specified priceB.purchase a futures contract for the delivery of options on a particular stockC.purchase a futures contract at a specified price for a specified period of timeD.deliver a futures contract and receive a specified price at a specific date in the future

21.Exchange traded stock options expire on the _______________ of the expiration month.A.second MondayB.third WednesdayC.second ThursdayD.third Friday

22.The writer of a put option _______________.A.agrees to sell shares at a set price if the option holder desiresB.agrees to buy shares at a set price if the option holder desiresC.has the right to buy shares at a set priceD.has the right to sell shares at a set price

23.Advantages of exchange traded options over OTC options include all but which one of the following?A.Ease and low cost of tradingB.Anonymity of participantsC.Contracts that are tailored to meet the needs of market participantsD.No concerns about counterparty credit risk

24.Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.A.1B.10C.100D.1,000

25.Exercise prices for listed stock options usually occur in increments of ____, and bracket the current stock price.A.$1B.$5C.$20D.$25

26.You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.A.time spreadB.long straddleC.short straddleD.money spread

27.In 1973, trading of standardized options on a national exchange started on the _________.A.AMEXB.CBOEC.NYSED.CFTC

28.An American call option gives the buyer the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

29.A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is _________.A.at the moneyB.in the moneyC.out of the moneyD.knocked out

30.You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________.A.time spreadB.long straddleC.short straddleD.money spread

31.A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.A.at the moneyB.in the moneyC.out of the moneyD.knocked in

32.You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.A.covered callB.long straddleC.naked callD.money spread

33.You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.A.time spreadB.long straddleC.short straddleD.money spread

34.A European call option gives the buyer the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

35.You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.A.long straddleB.naked putC.protective putD.short stroll

36.The value of a listed call option on a stock is lower when _______________.I. the exercise price is higherII. the contract approaches maturityIII. the stock decreases in valueIV. a stock split occursA.II, III and IV onlyB.I, III and IV onlyC.I, II and III onlyD.I, II, III and IV

37.The Option Clearing Corporation is owned by _________.A.the exchanges on which stock options are tradedB.the Federal Deposit Insurance CorporationC.the Federal Reserve systemD.major U.S. banks

38.The value of a listed put option on a stock is lower when _______________.I. the exercise price is higherII. the contract approaches maturityIII. the stock decreases in valueIV. a stock split occursA.II onlyB.II and IV onlyC.I, II and III onlyD.I, II, III and IV

39.The maximum loss a buyer of a stock call option can suffer is the _________.A.call premiumB.stock priceC.stock price minus the value of the callD.strike price minus the stock price

40.Which one of the statements about margin requirements on option positions is not correct?A.The margin required will be higher if the option is in the money.B.If the required margin exceeds the posted margin the option writer will receive a margin call.C.A buyer of a put or call option does not have to post margin.D.Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

41.A European put option gives its holder the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

42.The potential loss for a writer of a naked call option on a stock is _________.A.equal to the call premiumB.larger the lower the stock priceC.limitedD.unlimited

43.A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put option will want the value of the underlying asset to _________.A.decrease, decreaseB.decrease, increaseC.increase, decreaseD.increase, increase

44.Buyers of listed options __________ required to post margins and writers of naked listed options __________ required to post margins.A.are; are notB.are; areC.are not; areD.are not; are not

45.An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option.A.AmericanB.EuropeanC.AsianD.Australian

46.A down-and-out option is one type of ________ option.A.barrierB.lookbackC.digitalD.Asian

47.A "bet" option is also called a ____ option.A.barrierB.lookbackC.digitalD.foreign exchange

48.Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?A.SPXB.DJXC.CMED.OEX

49.The September 14, 2009 price quotation for a Boeing call option with a strike price of $50 due to expire in November is $3.50 while the stock price of Boeing is $51. The premium on one Boeing November 50 call contract is _________.A.$1B.$2.50C.$250.00D.$350.00

50.You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.A.$120B.$1,000C.$11,000D.$12,000

51.You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position is _________.A.$125B.$450C.$575D.unlimited

52.You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off __________ in August.A.only if the stock price is either lower than $44.25 or higher than $55.75B.only if the stock price is between $44.25 and $55.75C.only if the stock price is higher than $55.75D.only if the stock price is lower than $44.25

53.Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.A.$150B.$400C.$600D.$1,850

54.__________ is the most risky transaction to undertake in the stock index option markets if the stock market is expected to fall substantially after the transaction is completed.A.Writing an uncovered call optionB.Writing an uncovered put optionC.Buying a call optionD.Buying a put option

55.Which one of the following is a correct statement?A.Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.B.A convertible bond consists of a straight bond plus a specified number of detachable warrants.C.Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year.D.Call options may be convertible into the stock while warrants are not convertible into the stock.

56.A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and the maximum per share gain to the writer of an uncovered call is _________.A.$33.00; $3.50B.$33.00; $31.50C.$35.00; $3.50D.$35.00; $35.00

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

57.To establish a bull money spread with calls you would _______________.A.buy the 55 call and sell the 45 callB.buy the 45 call and buy the 55 callC.buy the 45 call and sell the 55 callD.sell the 45 call and sell the 55 call

58.Ignoring commissions, the cost to establish the bull money spread with calls would be _______.A.$1,050B.$650C.$400D.$400 income rather than cost

59.If in June the stock price is $53 your net profit on the bull money spread would be ________.A.$300B.-$400C.$150D.$50

60.To establish a bull money spread with puts you would _______________.A.sell the 55 put and buy the 45 putB.buy the 45 put and buy the 55 putC.buy the 55 put and sell the 45 putD.sell the 45 put and sell the 55 put

61.Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions the net profit on your position is __.A.$500B.$700C.$200D.$250

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

62.What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?A.Sell a callB.Purchase a putC.Sell a straddleD.Buy a straddle

63.Selling a straddle would generate total premium income of _____.A.$300B.$400C.$500D.$700

64.Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?A.$200B.$300C.$700D.$400

65.How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?A.Buy the call, sell the put; lend the present value of $40B.Sell the call, buy the put; lend the present value of $40C.Buy the call, sell the put; borrow the present value of $40D.Sell the call, buy the put; borrow the present value of $40

66.A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next three months. You believe there is a 30% chance the stock will drop by 5% and you think there is only a 10% chance of a major drop in price of 20%. At the money 3 month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of three months?A.$300B.$200C.$475D.$0

67.A covered call strategy benefits from what environment?A.Falling interest ratesB.Price stabilityC.Price volatilityD.Unexpected events

68.If you combine a long stock position with buying an at the money put option the resulting net payoff profile will resemble the payoff profile of a _______.A.long callB.short callC.short putD.long put

69.Which strategy benefits from upside price movement and has some protection should the price of the security fall?A.Bull spreadB.Long putC.Short callD.Straddle

70.What combination of puts and calls can simulate a long stock investment?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

71.An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current stock price is $35.10, what is the break even point for the investor?A.$32.50B.$35.00C.$37.50D.$37.60

72.An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $0.85, what is the break even point for the investor?A.$24.15B.$25.00C.$25.87D.$27.86

73.Which of the following strategies makes a profit if the stock price stays stable?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

74.Which of the following strategies makes a profit if the stock price declines and loses money when the stock price increases?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

75.If you combine a long stock position with selling an at the money call option the resulting net payoff profile will resemble the payoff profile of a _______.A.long callB.short callC.short putD.long put

76.What strategy could be considered insurance for an investment in a portfolio of stocks?A.Covered callB.Protective putC.Short putD.Straddle

77.What strategy is designed to ensure a value within the bounds of two different stock prices?A.CollarB.Covered CallC.Protective putD.Straddle

78.You are convinced that a stock's price will move by at least 15% over the next three months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?A.Buy a stripB.Buy a strapC.Buy a straddleD.Write a straddle

79.When issued most convertible bonds are issued _____________.A.deep in the moneyB.deep out of the moneyC.slightly out of the moneyD.slightly in the money

80.A convertible bond is deep in the money. This means the bond price will closely track the __________.A.straight debt value of the bondB.conversion value of the bondC.straight debt value of the bond minus the conversion valueD.straight debt value of the bond plus the conversion value

81.Warrants differ from listed options in that ________.I. exercise of warrants results in dilution of a firm's earnings per shareII. when warrants are exercised new shares of stock must be createdIII. warrant exercise result in cash flows to the firm whereas exercise of listed options does notA.I onlyB.I and II onlyC.II and III onlyD.I, II and III

82.Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock and Bond B is not. Bond A is priced at $1,245 and Bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%. The stock of Bond A is trading at $49.80 per share. Which of the following statements is/are correct?I. The value of the conversion option for Bond A is $125.II. The lower promised yield to maturity of Bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.III. Bond A can be converted into 25 shares of stock.A.II onlyB.I and III onlyC.III onlyD.I, II and III

83.You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000 your net profit on the position is ______.A.-$15B.$200C.$85D.$185

84.Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons but he is concerned the stock will drop in value before year end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.A.$195,000B.$220,000C.$175,000D.$215,000

85.You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell so you are considering purchasing either at the money or out of the money puts. If you decide to purchase the out of the money puts your maximum loss is __________ than if you buy at the money puts and your maximum gain is __________.A.greater; lowerB.greater; greaterC.lower; greaterD.lower; lower

86.You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2 for 1 split prior to the expiration date. You hold the option until the expiration date when IBM stock sells for $48 per share. You will realize a ______ on the investment.A.$300 profitB.$100 lossC.$400 lossD.$200 profit

87.You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You are considering either using puts or calls to hedge this position. Given this, which of the following statements is/are correct?I. One way to hedge your position would be to buy puts.II. One way to hedge your position would be to write calls.III. If major stock price declines are likely the hedging with puts is probably better than hedging with short calls.A.I onlyB.II onlyC.I and III onlyD.I, II and III

88.You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date when IBM stock sells for $95 per share. You will realize a ______ on this strip.A.$300 profitB.$100 lossC.$500 profitD.$200 profit

Chapter 15 Options Markets Answer Key

Multiple Choice Questions

1.You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$200 profitB.$200 lossC.$300 profitD.$300 loss

Long Call Profit = Max[0,($123 - $120)(100)] - $500 = -$200

Difficulty: Medium2.You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$200 profitB.$200 lossC.$500 profitD.$500 loss

Long Call Profit = Max[0,($123 - $125)(100)] - $500 = -$500

Difficulty: Medium3.You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.A.$300 profitB.$300 lossC.$500 lossD.$200 profit

Long Put Profit = Max[0,($120 - $123)(100)] - $300 = -$300

Difficulty: Medium4.You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $121 per share. You will realize a ______ on the investment.A.$300 profitB.$200 lossC.$600 lossD.$200 profit

Short Call Profit = Min[0,($120 - $121))(100)] + $400 = $300

Difficulty: Medium5.A(n) ______ option can only be exercised on the expiration date.A.MexicanB.AsianC.AmericanD.European

Difficulty: Easy6.All else the same, an ______ style option will be ______ valuable than a ______ style option.A.American, more, EuropeanB.American, less, EuropeanC.American, more, CanadianD.American, less, Canadian

Difficulty: Medium7.At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.A.Max(0, ST - X)B.Min(0, ST - X)C.Max(0, X - ST)D.Min(0, X - ST)

Difficulty: Medium8.At contract maturity the value of a put option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.A.Max(0, ST - X)B.Min(0, ST - X)C.Max(0, X - ST)D.Min(0, X - ST)

Difficulty: Medium9.An American put option gives its holder the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

Difficulty: Easy10.An Asian call option gives its holder the right to ____________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at a price determined by the average stock price during some specified portion of the option's lifeC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Difficulty: Easy11.An Asian put option gives its holder the right to ____________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at a price determined by the average stock price during some specified portion of the option's lifeC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Difficulty: Easy12.A down-and-out option _______________.A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termB.provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionC.expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termD.expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

Difficulty: Easy13.A down-and-in option _______________.A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termB.provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionC.expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option termD.expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

Difficulty: Easy14.A quanto provides its holder with ______________.A.the right to participate in the payoffs from a portfolio of gambling casino stocksB.the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rateC.the right to participate in the investment performance of a foreign securityD.the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

Difficulty: Medium15.You purchase a call option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and C0 is the original purchase price of the option.A.Max(-C0, ST - X - C0)B.Min(-C0, ST - X - C0)C.Max(C0, ST - X + C0)D.Max(0, ST - X - C0)

Difficulty: Medium16.A lookback option provides its holder with _______________.A.a payoff determined by either the maximum or minimum price of the underlying stock during the life of the optionB.a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the optionC.a payoff if the firm's stock price falls below some specified dollar amount during the term of the optionD.a payoff based on the average price of the underlying stock over the life of the option

Difficulty: Easy17.You write a put option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and P0 is the original premium of the put option.A.Max(P0, X - ST - P0)B.Min(-P0, X - ST - P0)C.Min(P0, ST - X + P0)D.Max(0, ST - X - P0)

Difficulty: Hard18.Longer term American style options with maturities of up to three years are called __________.A.warrantsB.LEAPSC.GICsD.CATs

Difficulty: Easy19.The initial maturities of most exchange traded options are generally __________.A.less than a yearB.less than 2 yearsC.between 1 and 2 yearsD.between 1 and 3 years

Difficulty: Easy20.A futures call option provides its holder with the right to ___________.A.purchase a particular stock at some time in the future at a specified priceB.purchase a futures contract for the delivery of options on a particular stockC.purchase a futures contract at a specified price for a specified period of timeD.deliver a futures contract and receive a specified price at a specific date in the future

Difficulty: Easy21.Exchange traded stock options expire on the _______________ of the expiration month.A.second MondayB.third WednesdayC.second ThursdayD.third Friday

Difficulty: Medium22.The writer of a put option _______________.A.agrees to sell shares at a set price if the option holder desiresB.agrees to buy shares at a set price if the option holder desiresC.has the right to buy shares at a set priceD.has the right to sell shares at a set price

Difficulty: Easy23.Advantages of exchange traded options over OTC options include all but which one of the following?A.Ease and low cost of tradingB.Anonymity of participantsC.Contracts that are tailored to meet the needs of market participantsD.No concerns about counterparty credit risk

Difficulty: Easy24.Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.A.1B.10C.100D.1,000

Difficulty: Easy25.Exercise prices for listed stock options usually occur in increments of ____, and bracket the current stock price.A.$1B.$5C.$20D.$25

Difficulty: Easy26.You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.A.time spreadB.long straddleC.short straddleD.money spread

Difficulty: Easy27.In 1973, trading of standardized options on a national exchange started on the _________.A.AMEXB.CBOEC.NYSED.CFTC

Difficulty: Easy28.An American call option gives the buyer the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

Difficulty: Easy29.A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is _________.A.at the moneyB.in the moneyC.out of the moneyD.knocked out

Difficulty: Easy30.You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________.A.time spreadB.long straddleC.short straddleD.money spread

Difficulty: Easy31.A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.A.at the moneyB.in the moneyC.out of the moneyD.knocked in

Difficulty: Easy32.You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.A.covered callB.long straddleC.naked callD.money spread

Difficulty: Easy33.You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.A.time spreadB.long straddleC.short straddleD.money spread

Difficulty: Easy34.A European call option gives the buyer the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

Difficulty: Easy35.You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.A.long straddleB.naked putC.protective putD.short stroll

Difficulty: Medium36.The value of a listed call option on a stock is lower when _______________.I. the exercise price is higherII. the contract approaches maturityIII. the stock decreases in valueIV. a stock split occursA.II, III and IV onlyB.I, III and IV onlyC.I, II and III onlyD.I, II, III and IV

Difficulty: Medium37.The Option Clearing Corporation is owned by _________.A.the exchanges on which stock options are tradedB.the Federal Deposit Insurance CorporationC.the Federal Reserve systemD.major U.S. banks

Difficulty: Easy38.The value of a listed put option on a stock is lower when _______________.I. the exercise price is higherII. the contract approaches maturityIII. the stock decreases in valueIV. a stock split occursA.II onlyB.II and IV onlyC.I, II and III onlyD.I, II, III and IV

Difficulty: Medium39.The maximum loss a buyer of a stock call option can suffer is the _________.A.call premiumB.stock priceC.stock price minus the value of the callD.strike price minus the stock price

Difficulty: Easy40.Which one of the statements about margin requirements on option positions is not correct?A.The margin required will be higher if the option is in the money.B.If the required margin exceeds the posted margin the option writer will receive a margin call.C.A buyer of a put or call option does not have to post margin.D.Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

Difficulty: Medium41.A European put option gives its holder the right to _________.A.buy the underlying asset at the exercise price on or before the expiration dateB.buy the underlying asset at the exercise price only at the expiration dateC.sell the underlying asset at the exercise price on or before the expiration dateD.sell the underlying asset at the exercise price only at the expiration date

Difficulty: Easy42.The potential loss for a writer of a naked call option on a stock is _________.A.equal to the call premiumB.larger the lower the stock priceC.limitedD.unlimited

Difficulty: Medium43.A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put option will want the value of the underlying asset to _________.A.decrease, decreaseB.decrease, increaseC.increase, decreaseD.increase, increase

Difficulty: Medium44.Buyers of listed options __________ required to post margins and writers of naked listed options __________ required to post margins.A.are; are notB.are; areC.are not; areD.are not; are not

Difficulty: Medium45.An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option.A.AmericanB.EuropeanC.AsianD.Australian

Difficulty: Easy46.A down-and-out option is one type of ________ option.A.barrierB.lookbackC.digitalD.Asian

Difficulty: Medium47.A "bet" option is also called a ____ option.A.barrierB.lookbackC.digitalD.foreign exchange

Difficulty: Medium48.Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?A.SPXB.DJXC.CMED.OEX

Difficulty: Medium49.The September 14, 2009 price quotation for a Boeing call option with a strike price of $50 due to expire in November is $3.50 while the stock price of Boeing is $51. The premium on one Boeing November 50 call contract is _________.A.$1B.$2.50C.$250.00D.$350.00

Difficulty: Easy50.You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.A.$120B.$1,000C.$11,000D.$12,000

Profit = 100(120 - 10) = 11,000.00

Difficulty: Medium51.You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position is _________.A.$125B.$450C.$575D.unlimited

Loss = 100(1.25 + 4.50) = 575.00 if stock price is $50 at expiration.

Difficulty: Medium52.You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off __________ in August.A.only if the stock price is either lower than $44.25 or higher than $55.75B.only if the stock price is between $44.25 and $55.75C.only if the stock price is higher than $55.75D.only if the stock price is lower than $44.25

You have positive profit in the range $50 - ($1.25 + $4.50) and $50 + ($1.25 + $4.50)

Difficulty: Medium53.Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.A.$150B.$400C.$600D.$1,850

Profit = 100 [(79 - 75)] - 8.50 + 6.00] = $150

Difficulty: Hard54.__________ is the most risky transaction to undertake in the stock index option markets if the stock market is expected to fall substantially after the transaction is completed.A.Writing an uncovered call optionB.Writing an uncovered put optionC.Buying a call optionD.Buying a put option

Difficulty: Easy55.Which one of the following is a correct statement?A.Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.B.A convertible bond consists of a straight bond plus a specified number of detachable warrants.C.Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year.D.Call options may be convertible into the stock while warrants are not convertible into the stock.

Difficulty: Medium56.A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and the maximum per share gain to the writer of an uncovered call is _________.A.$33.00; $3.50B.$33.00; $31.50C.$35.00; $3.50D.$35.00; $35.00

Maximum per share loss to put writer = (35 - 0) + 2 = 33.00 if stock price is $0 at expiration.Maximum per share gain to call writer = 3.50 if stock price is below $40 at expiration.

Difficulty: MediumYou are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

57.To establish a bull money spread with calls you would _______________.A.buy the 55 call and sell the 45 callB.buy the 45 call and buy the 55 callC.buy the 45 call and sell the 55 callD.sell the 45 call and sell the 55 call

Difficulty: Medium58.Ignoring commissions, the cost to establish the bull money spread with calls would be _______.A.$1,050B.$650C.$400D.$400 income rather than cost

To establish a bull money spread with calls you would buy the 45 call at a cost of $8.50 and write the 55 call, earning the $2.00 premium. The initial cost is ($2.00 - $8.50)(100) = -$650.

Difficulty: Hard59.If in June the stock price is $53 your net profit on the bull money spread would be ________.A.$300B.-$400C.$150D.$50

ST = $53 at contract maturity in June. Profit = C45,June - C55,June - Initial CostProfit = [Max(0,$53 - $45)-Max(0, $53 - $55)](100) - $650 = $150

Difficulty: Hard60.To establish a bull money spread with puts you would _______________.A.sell the 55 put and buy the 45 putB.buy the 45 put and buy the 55 putC.buy the 55 put and sell the 45 putD.sell the 45 put and sell the 55 put

Difficulty: Medium61.Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions the net profit on your position is __.A.$500B.$700C.$200D.$250

To establish a bull money spread with puts you would buy the 45 put at a cost of $2.00 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 - $2.00)(100) = $550.ST = $52 at contract maturity in June. Profit = P45,June - P55,June + Initial RevenueProfit = [Max(0,$45 - $52) - Max(0, $55 - $52)](100) + $550 = $250

Difficulty: HardThe common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

62.What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?A.Sell a callB.Purchase a putC.Sell a straddleD.Buy a straddle

Difficulty: Medium63.Selling a straddle would generate total premium income of _____.A.$300B.$400C.$500D.$700

Sell a straddle = sell a put + sell a callPremium income for selling a straddle = (P0 + C0)100 = ($3 + $4)(100) = $700

Difficulty: Medium64.Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?A.$200B.$300C.$700D.$400

Selling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = ((2)(4) + 3)(100) = $1100. If the final stock price is $42 the position profit is found as Profit = [-2Max($0,$42 - 40) + Max($0,$40 - $42)](100) + $1100 = $700

Difficulty: Hard65.How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?A.Buy the call, sell the put; lend the present value of $40B.Sell the call, buy the put; lend the present value of $40C.Buy the call, sell the put; borrow the present value of $40D.Sell the call, buy the put; borrow the present value of $40

Difficulty: Hard66.A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next three months. You believe there is a 30% chance the stock will drop by 5% and you think there is only a 10% chance of a major drop in price of 20%. At the money 3 month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of three months?A.$300B.$200C.$475D.$0

E[Profit] = -[0.60Max($0,$50 - ($50)(1.1)) + 0.30Max($0,$50 - ($50)(0.95)) + 0.10Max($0,$50 - ($50)(0.80))](100) + $650 = - [0.6 (0) + 0.3(250) + 0.1(1000)] + 650 = $475

Difficulty: Hard67.A covered call strategy benefits from what environment?A.Falling interest ratesB.Price stabilityC.Price volatilityD.Unexpected events

Difficulty: Medium68.If you combine a long stock position with buying an at the money put option the resulting net payoff profile will resemble the payoff profile of a _______.A.long callB.short callC.short putD.long put

Difficulty: Medium69.Which strategy benefits from upside price movement and has some protection should the price of the security fall?A.Bull spreadB.Long putC.Short callD.Straddle

Difficulty: Medium70.What combination of puts and calls can simulate a long stock investment?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

Difficulty: Medium71.An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current stock price is $35.10, what is the break even point for the investor?A.$32.50B.$35.00C.$37.50D.$37.60

Break even = 35.00 + 2.50 = 37.50

Difficulty: Easy72.An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $0.85, what is the break even point for the investor?A.$24.15B.$25.00C.$25.87D.$27.86

Break even = 25 - .85 = 24.15

Difficulty: Easy73.Which of the following strategies makes a profit if the stock price stays stable?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

Difficulty: Medium74.Which of the following strategies makes a profit if the stock price declines and loses money when the stock price increases?A.Long call and short putB.Long call and long putC.Short call and short putD.Short call and long put

Difficulty: Medium75.If you combine a long stock position with selling an at the money call option the resulting net payoff profile will resemble the payoff profile of a _______.A.long callB.short callC.short putD.long put

Difficulty: Hard76.What strategy could be considered insurance for an investment in a portfolio of stocks?A.Covered callB.Protective putC.Short putD.Straddle

Difficulty: Medium77.What strategy is designed to ensure a value within the bounds of two different stock prices?A.CollarB.Covered CallC.Protective putD.Straddle

Difficulty: Medium78.You are convinced that a stock's price will move by at least 15% over the next three months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?A.Buy a stripB.Buy a strapC.Buy a straddleD.Write a straddle

Difficulty: Hard79.When issued most convertible bonds are issued _____________.A.deep in the moneyB.deep out of the moneyC.slightly out of the moneyD.slightly in the money

Difficulty: Medium80.A convertible bond is deep in the money. This means the bond price will closely track the __________.A.straight debt value of the bondB.conversion value of the bondC.straight debt value of the bond minus the conversion valueD.straight debt value of the bond plus the conversion value

Difficulty: Medium81.Warrants differ from listed options in that ________.I. exercise of warrants results in dilution of a firm's earnings per shareII. when warrants are exercised new shares of stock must be createdIII. warrant exercise result in cash flows to the firm whereas exercise of listed options does notA.I onlyB.I and II onlyC.II and III onlyD.I, II and III

Difficulty: Medium82.Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock and Bond B is not. Bond A is priced at $1,245 and Bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%. The stock of Bond A is trading at $49.80 per share. Which of the following statements is/are correct?I. The value of the conversion option for Bond A is $125.II. The lower promised yield to maturity of Bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.III. Bond A can be converted into 25 shares of stock.A.II onlyB.I and III onlyC.III onlyD.I, II and III

I. value of conversion option = $1,245 - $1,120 = $125II. the lower yield on the bond that differs only in it conversion feature indicates the bond is priced according to its conversion value, not its straight debt valueIII. $1,245/$49.80 = $25.00

Difficulty: Hard83.You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000 your net profit on the position is ______.A.-$15B.$200C.$85D.$185

Initial cost = -C300 + C305 = -$68 + $53 = -$15At actual jobless claims of 303,000 at contract maturity the C300 call is worth $100 and the C305 call is worthless. Profit = + $100 - $0 -$15 = $85

Difficulty: Medium84.Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons but he is concerned the stock will drop in value before year end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.A.$195,000B.$220,000C.$175,000D.$215,000

Position value = 5000 shares x $45/share = $225,000. To establish a collar you would need 5000/100 = 50 options. You would buy the 50 puts at a cost of $3(100)(50) = $15,000 and write the 50 calls, earning a premium of $2(100)(50) = $10,000. The initial cost is $15,000 - $10,000 = $5,000. If the stock price in January is $35 then profit can be found as:Profit = [Max($0,$40 - $35) - Max($0,$35 - $50)](100)(50) - $5,000 = $20,000New Stock value = 5000 shares x $35 = $175,000 so net position value = $175,000 + $20,000 = $195,000

Difficulty: Hard85.You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell so you are considering purchasing either at the money or out of the money puts. If you decide to purchase the out of the money puts your maximum loss is __________ than if you buy at the money puts and your maximum gain is __________.A.greater; lowerB.greater; greaterC.lower; greaterD.lower; lower

Difficulty: Hard86.You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2 for 1 split prior to the expiration date. You hold the option until the expiration date when IBM stock sells for $48 per share. You will realize a ______ on the investment.A.$300 profitB.$100 lossC.$400 lossD.$200 profit

Long Call Profit = 2Max[0,($48 - ($90/2)(100)] - $400 = $200

Difficulty: Hard87.You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You are considering either using puts or calls to hedge this position. Given this, which of the following statements is/are correct?I. One way to hedge your position would be to buy puts.II. One way to hedge your position would be to write calls.III. If major stock price declines are likely the hedging with puts is probably better than hedging with short calls.A.I onlyB.II onlyC.I and III onlyD.I, II and III

Difficulty: Medium88.You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date when IBM stock sells for $95 per share. You will realize a ______ on this strip.A.$300 profitB.$100 lossC.$500 profitD.$200 profit

Selling an IBM July 90 strip entails selling two IBM July 90 puts and one IBM July 90 call. Initial income = C90 + 2P90 = (4 + 2(3))(100) = $1000. If the final stock price is $95 the position value is found asProfit = [-Max($0,$95 - 90) + 2Max($0,$90 - $95)](100) + $1000 = -$500 + $1000 = $500

Difficulty: Hard15-50