Deck 15: Options Markets

Question 1

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 term
B) provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option
C) expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term
D) expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

Answer 1

B

Question 2

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 option
B) a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the option
C) a payoff if the firm's stock price falls below some specified dollar amount during the term of the option
D) a payoff based on the average price of the underlying stock over the life of the option

Answer 2

A

Question 3

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 price
B) purchase a futures contract for the delivery of options on a particular stock
C) purchase a futures contract at a specified price for a specified period of time
D) deliver a futures contract and receive a specified price at a specific date in the future

Answer 3

C

Question 4

Longer term American style options with maturities of up to three years are called __________.

A) warrants
B) LEAPS
C) GICs
D) CATs

Question 5

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 profit
B) $200 loss
C) $500 profit
D) $500 loss

Question 6

All else the same,an ______ style option will be ______ valuable than a ______ style option.

A) American, more, European
B) American, less, European
C) American, more, Canadian
D) American, less, Canadian

Question 7

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 profit
B) $300 loss
C) $500 loss
D) $200 profit

Question 8

An Asian call option gives its holder the right to ____________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Question 9

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,S_T is the stock price at contract expiration and P₀ is the original premium of the put option.

A) Max(P₀, X - S_T - P₀)
B) Min(-P₀, X - S_T - P₀)
C) Min(P₀, S_T - X + P₀)
D) Max(0, S_T - X - P₀)

Question 10

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,S_T is the stock price at contract expiration and C₀ is the original purchase price of the option.

A) Max(-C₀, S_T - X - C₀)
B) Min(-C₀, S_T - X - C₀)
C) Max(C₀, S_T - X + C₀)
D) Max(0, S_T - X - C₀)

Question 11

The initial maturities of most exchange traded options are generally __________.

A) less than a year
B) less than 2 years
C) between 1 and 2 years
D) between 1 and 3 years

Question 12

At contract maturity the value of a put option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.

A) Max(0, S_T - X)
B) Min(0, S_T - X)
C) Max(0, X - S_T)
D) Min(0, X - S_T)

Question 13

A quanto provides its holder with ______________.

A) the right to participate in the payoffs from a portfolio of gambling casino stocks
B) the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
C) the right to participate in the investment performance of a foreign security
D) the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

Question 14

An American put option gives its holder the right to _________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date

Question 15

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 profit
B) $200 loss
C) $300 profit
D) $300 loss

Question 16

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 profit
B) $200 loss
C) $600 loss
D) $200 profit

Question 17

A(n)______ option can only be exercised on the expiration date.

A) Mexican
B) Asian
C) American
D) European

Question 18

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 term
B) provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option
C) expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term
D) expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

Question 19

An Asian put option gives its holder the right to ____________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Question 20

At contract maturity the value of a call option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.

A) Max(0, S_T - X)
B) Min(0, S_T - X)
C) Max(0, X - S_T)
D) Min(0, X - S_T)

Question 21

The writer of a put option _______________.

A) agrees to sell shares at a set price if the option holder desires
B) agrees to buy shares at a set price if the option holder desires
C) has the right to buy shares at a set price
D) has the right to sell shares at a set price

Question 22

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 spread
B) long straddle
C) short straddle
D) money spread

Question 23

The value of a listed put option on a stock is lower when _______________.
I)the exercise price is higher
II)the contract approaches maturity
III)the stock decreases in value
IV)a stock split occurs

A) II only
B) II and IV only
C) I, II and III only
D) I, II, III and IV

Question 24

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 spread
B) long straddle
C) short straddle
D) money spread

Question 25

A European call option gives the buyer the right to _________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date

Question 26

Exercise prices for listed stock options usually occur in increments of ____,and bracket the current stock price.

A) $1
B) $5
C) $20
D) $25

Question 27

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 money
B) in the money
C) out of the money
D) knocked out

Question 28

Advantages of exchange traded options over OTC options include all but which one of the following?

A) Ease and low cost of trading
B) Anonymity of participants
C) Contracts that are tailored to meet the needs of market participants
D) No concerns about counterparty credit risk

Question 29

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

A) 1
B) 10
C) 100
D) 1,000

Question 30

The value of a listed call option on a stock is lower when _______________.
I)the exercise price is higher
II)the contract approaches maturity
III)the stock decreases in value
IV)a stock split occurs

A) II, III and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 31

The maximum loss a buyer of a stock call option can suffer is the _________.

A) call premium
B) stock price
C) stock price minus the value of the call
D) strike price minus the stock price

Question 32

You invest in the stock of Valleyview Corp.and purchase a put option on Valleyview Corp.This strategy is called a _________.

A) long straddle
B) naked put
C) protective put
D) short stroll

Question 33

In 1973,trading of standardized options on a national exchange started on the _________.

A) AMEX
B) CBOE
C) NYSE
D) CFTC

Question 34

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 money
B) in the money
C) out of the money
D) knocked in

Question 35

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 spread
B) long straddle
C) short straddle
D) money spread

Question 36

You invest in the stock of Rayleigh Corp.and write a call option on Rayleigh Corp.This strategy is called a _________.

A) covered call
B) long straddle
C) naked call
D) money spread

Question 37

Exchange traded stock options expire on the _______________ of the expiration month.

A) second Monday
B) third Wednesday
C) second Thursday
D) third Friday

Question 38

An American call option gives the buyer the right to _________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date

Question 39

The Option Clearing Corporation is owned by _________.

A) the exchanges on which stock options are traded
B) the Federal Deposit Insurance Corporation
C) the Federal Reserve system
D) major U.S. banks

Question 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.

Question 41

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; $3.50
B) $33.00; $31.50
C) $35.00; $3.50
D) $35.00; $35.00

Question 42

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) American
B) European
C) Asian
D) Australian

Question 43

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:
To establish a bull money spread with puts you would _______________.

A) sell the 55 put and buy the 45 put
B) buy the 45 put and buy the 55 put
C) buy the 55 put and sell the 45 put
D) sell the 45 put and sell the 55 put

Question 44

The potential loss for a writer of a naked call option on a stock is _________.

A) equal to the call premium
B) larger the lower the stock price
C) limited
D) unlimited

Question 45

Buyers of listed options __________ required to post margins and writers of naked listed options __________ required to post margins.

A) are; are not
B) are; are
C) are not; are
D) are not; are not

Question 46

A "bet" option is also called a ____ option.

A) barrier
B) lookback
C) digital
D) foreign exchange

Question 47

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) $125
B) $450
C) $575
D) unlimited

Question 48

A down-and-out option is one type of ________ option.

A) barrier
B) lookback
C) digital
D) Asian

Question 49

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) $150
B) $400
C) $600
D) $1,850

Question 50

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:
To establish a bull money spread with calls you would _______________.

A) buy the 55 call and sell the 45 call
B) buy the 45 call and buy the 55 call
C) buy the 45 call and sell the 55 call
D) sell the 45 call and sell the 55 call

Question 51

Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?

A) SPX
B) DJX
C) CME
D) OEX

Question 52

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, decrease
B) decrease, increase
C) increase, decrease
D) increase, increase

Question 53

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 $55.75
B) only if the stock price is between $44.25 and $55.75
C) only if the stock price is higher than $55.75
D) only if the stock price is lower than $44.25

Question 54

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:
Ignoring commissions,the cost to establish the bull money spread with calls would be _______.

A) $1,050
B) $650
C) $400
D) $400 income rather than cost

Question 55

A European put option gives its holder the right to _________.

A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date

Question 56

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) $120
B) $1,000
C) $11,000
D) $12,000

Question 57

__________ 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 option
B) Writing an uncovered put option
C) Buying a call option
D) Buying a put option

Question 58

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.

Question 59

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:
If in June the stock price is $53 your net profit on the bull money spread would be ________.

A) $300
B) -$400
C) $150
D) $50

Question 60

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) $1
B) $2.50
C) $250.00
D) $350.00

Question 61

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.
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) $200
B) $300
C) $700
D) $400

Question 62

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.
Selling a straddle would generate total premium income of _____.

A) $300
B) $400
C) $500
D) $700

Question 63

What combination of puts and calls can simulate a long stock investment?

A) Long call and short put
B) Long call and long put
C) Short call and short put
D) Short call and long put

Question 64

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) $300
B) $200
C) $475
D) $0

Question 65

A convertible bond is deep in the money.This means the bond price will closely track the __________.

A) straight debt value of the bond
B) conversion value of the bond
C) straight debt value of the bond minus the conversion value
D) straight debt value of the bond plus the conversion value

Question 66

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

A) Bull spread
B) Long put
C) Short call
D) Straddle

Question 67

A covered call strategy benefits from what environment?

A) Falling interest rates
B) Price stability
C) Price volatility
D) Unexpected events

Question 68

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) $32.50
B) $35.00
C) $37.50
D) $37.60

Question 69

What strategy is designed to ensure a value within the bounds of two different stock prices?

A) Collar
B) Covered Call
C) Protective put
D) Straddle

Question 70

When issued most convertible bonds are issued _____________.

A) deep in the money
B) deep out of the money
C) slightly out of the money
D) slightly in the money

Question 71

Which of the following strategies makes a profit if the stock price stays stable?

A) Long call and short put
B) Long call and long put
C) Short call and short put
D) Short call and long put

Question 72

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 call
B) short call
C) short put
D) long put

Question 73

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.
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 call
B) Purchase a put
C) Sell a straddle
D) Buy a straddle

Question 74

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 strip
B) Buy a strap
C) Buy a straddle
D) Write a straddle

Question 75

What strategy could be considered insurance for an investment in a portfolio of stocks?

A) Covered call
B) Protective put
C) Short put
D) Straddle

Question 76

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) $24.15
B) $25.00
C) $25.87
D) $27.86

Question 77

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.
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 $40
B) Sell the call, buy the put; lend the present value of $40
C) Buy the call, sell the put; borrow the present value of $40
D) Sell the call, buy the put; borrow the present value of $40

Question 78

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 put
B) Long call and long put
C) Short call and short put
D) Short call and long put

Question 79

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 call
B) short call
C) short put
D) long put

Question 80

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:
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) $500
B) $700
C) $200
D) $250