Question 1

ETF options are settled in
A) the writer has the choice of settling in either cash or ETF shares.
B) ETF shares.
C) share of the companies in the index.
D) cash.

Accepted Answer

ETF options are typically settled in ETF shares, meaning the holder of the option can buy or sell the underlying ETF shares upon exercise.

Question 2

The purchase of a June 25 call on XXO share and the sale of a June 30 call on XXO share is known as a
A) horizontal spread.
B) long straddle.
C) vertical spread.
D) short straddle.

Accepted Answer

A vertical spread involves buying and selling options of the same class (calls or puts) with the same expiration date but different strike prices, such as buying a June 25 call and selling a June 30 call.

Question 3

The price of ABC shares is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six- month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes.
A) 200%.
B) 150%.
C) 250%.
D) 300%.

Accepted Answer

B

Question 4

If the Canadian dollar became stronger relative to the Australian dollar, the price of
A) both the call and the put options on the Canadian dollar will decrease.
B) a call option on the Canadian dollar will decrease.
C) a call option on the Canadian dollar will increase.
D) a put option on the Canadian dollar will increase.

Accepted Answer

A stronger Canadian dollar means it is more valuable, making a call option (the right to buy) on the Canadian dollar more valuable, as it allows the holder to purchase the currency at a potentially lower price than the market rate.

Question 5

The most important factor affecting the market price of a put or call is the
A) expiration date.
B) market interest rate.
C) price behaviour of the corresponding warrant.
D) price behaviour of the underlying shares.

Accepted Answer

The market price of a put or call option is primarily influenced by the price behavior of the underlying shares, as options derive their value from the underlying asset.

Question 6

The value of an interest rate call option
A) is based on the market price of U.S. Treasury securities.
B) increases when the yield on the underlying Treasury security rises.
C) decreases when the price of U.S. Treasuries decreases.
D) varies directly with the price of the underlying corporate bond.

Accepted Answer

The value of an interest rate call option increases when the yield on the underlying Treasury security rises because the option becomes more valuable as the potential for higher interest rates increases.

Question 7

ABC shares are currently selling for $128. Which of the following options is "in- the- money"?
A) February 125 call.
B) March 125 put.
C) February 100 put.
D) March 130 call.

Accepted Answer

An option is "in-the-money" if exercising it would result in a profit. A call option is in-the-money if the stock price is above the strike price. The February 125 call is in-the-money because the stock price ($128) is above the strike price ($125).

Question 8

Fred bought 600 shares of Edgewood shares at a price of $19. The shares are currently selling for $53 a share. To protect his profits, Fred should buy
A) 6 put options with a strike price of $50.
B) 6 call options with a strike price of $55.
C) 600 call options with a strike price of $55.
D) 600 put options with a strike price of $50.

Accepted Answer

Fred should buy 6 put options with a strike price of $50 to protect his profits. This is because if the stock price falls below $50, the put options will increase in value, offsetting the losses on his shares.

Question 9

Which one of the following actions would be the most appropriate hedge to a short sale of shares?
A) Sale of a call.
B) Purchase of a call.
C) Purchase of a put.
D) Sale of a put.

Accepted Answer

Purchasing a call option provides the right to buy the shares at a specified price, which can offset potential losses if the stock price rises after a short sale.

Question 10

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?
A) $100.
B) $3,250.
C) $350.
D) Her profit potential is unlimited.

Accepted Answer

The maximum profit on a put option is calculated as the strike price minus the premium paid, multiplied by the number of shares (usually 100 per contract). Here, it's ($35 - $0) * 100 - $250 = $3,250.

Question 11

Kyle believes the price of Ajax shares is about to decrease. If he wants to profit from the decline in price, he should____________ on Ajax shares.
A) sell a put
B) buy a put
C) write a put
D) buy a call

Accepted Answer

Kyle believes the price of Ajax shares is about to decrease. If he wants to profit from the decline in price, he should buy a put. A put gives the holder the right, but not the obligation, to sell a specified number of shares of a particular stock at a specified price on or before a specified date. If the price of Ajax shares decreases, Kyle can exercise his put option and sell his shares at the higher price specified in the option contract, thereby profiting from the decline in price.

Question 12

The strike price of a put option is the price
A) of the underlying share at the time that the options contract is purchased.
B) at which the underlying share can be sold.
C) at which the underlying share can be bought.
D) an investor must pay for the options contract.

Accepted Answer

The strike price of a put option is the price at which the holder of the option can sell the underlying asset.

Question 13

For all practical purposes, listed share options always expire
A) on the last business day of the expiration month.
B) on the Thursday before the last Friday of the expiration month.
C) three months from the date of the option purchase.
D) on the first Monday of every calendar quarter.

Accepted Answer

Listed share options typically expire on the third Friday of the expiration month, but trading ends on the Thursday before that Friday.

Question 14

Grant purchased one call on XYZ shares at an exercise price of $25. The market price of XYZ shares when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction- related costs.
A) $500.
B) $480.
C) $380.
D) $600.

Accepted Answer

The answer of Grant purchased one call on XYZ shares...

Question 15

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying shares sell for $24?
A) $100.
B) $400.
C) $300.
D) $200.

Accepted Answer

The answer of What is the time premium of a...

Question 16

The writer of a put
A) is hoping that the put will be in- the- money prior to expiration.
B) accepts the obligation to sell a predetermined number of shares at a predetermined price.
C) is betting the price of the underlying security will increase in value.
D) will pay the premium whether or not the option is exercised.

Accepted Answer

The writer of a put option is betting that the price of the underlying security will increase, so the option will expire worthless, and they can keep the premium received.

Question 17

Purchasers of share options
A) have the right to buy or sell a certain number of underlying shares.
B) own a financial asset with benefits of firm ownership.
C) have the obligation to buy or sell a predetermined amount of shares at the strike price.
D) have a claim on the profits of the firm issuing the underlying securities.

Accepted Answer

Purchasers of share options have the right, but not the obligation, to buy or sell a certain number of underlying shares at a predetermined price within a specified time period.

Question 18

Warrants
A) provide substantially less capital appreciation potential than the underlying share.
B) tend to be quite costly.
C) are not traded in the secondary markets because of their low unit costs.
D) have a stipulated price and an expiration date.

Accepted Answer

Warrants give the holder the right to purchase the underlying stock at a specified price before the expiration date, similar to options.

Question 19

Steve bought 300 shares at a price of $20 per share. The price then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of
A) $200.
B) $240.
C) $3,000.
D) $2,640.

Accepted Answer

Steve's profit from the shares is ($33 - $20) * 300 = $3,900. The puts are worthless since the market price ($22) is below the exercise price ($30), so he loses $120 * 3 = $360 on the puts. Net profit is $3,900 - $360 = $3,540. However, since the market price is $22, he would sell the shares at $22, not $33, resulting in a loss of ($33 - $22) * 300 = $3,300. Therefore, the net profit is $3,900 - $3,300 - $360 = $240.

Question 20

In nearly all cases, the purpose of a hedge is to
A) speculate on a downward drop in a general market index.
B) speculate on an upward movement in a given currency.
C) reduce or eliminate risk.
D) make a very high profit in an extremely short time frame.

Accepted Answer

The primary purpose of a hedge is to reduce or eliminate risk by taking an offsetting position in a related asset.

Quiz 14: Options: Puts and Calls

ETF options are settled in

The purchase of a June 25 call on XXO share and the sale of a June 30 call on XXO share is known as a

If the Canadian dollar became stronger relative to the Australian dollar, the price of

The most important factor affecting the market price of a put or call is the

The value of an interest rate call option

ABC shares are currently selling for $128. Which of the following options is "in- the- money"?

Fred bought 600 shares of Edgewood shares at a price of $19. The shares are currently selling for $53 a share. To protect his profits, Fred should buy

Which one of the following actions would be the most appropriate hedge to a short sale of shares?

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?

Kyle believes the price of Ajax shares is about to decrease. If he wants to profit from the decline in price, he should____________ on Ajax shares.

The strike price of a put option is the price

For all practical purposes, listed share options always expire

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying shares sell for $24?

The writer of a put

Purchasers of share options

Warrants

In nearly all cases, the purpose of a hedge is to