Question 1

Which term applies to the purchase or sale of an underlying asset via an option contract?

Accepted Answer

Exercising the option refers to the actual purchase or sale of the underlying asset, which is done by the holder of the option when they choose to use their right to buy or sell at the agreed-upon price (the strike price) in the contract.

Question 2

Which one of these combinations is a protective put?

Accepted Answer

A protective put involves buying a put option while also owning the underlying asset, providing downside protection.

Question 3

A ________ is a derivative security that grants the owner the right,but not the obligation,to buy an asset at a fixed price during a specified period of time.

Accepted Answer

A call option grants the owner the right, but not the obligation, to buy an asset (such as a stock or commodity) at a fixed price (the strike price) during a specific time frame (the expiration date). This allows the owner to potentially profit from the asset's price going up, without having to actually purchase the asset.

Question 4

The maximum payoff to the seller of a call is

Accepted Answer

The maximum payoff to the seller (also known as the writer) of a call option is the premium received for selling the option. This occurs when the option expires worthless (i.e., the stock price is below the exercise price at expiration), meaning the seller keeps the entire premium as profit. This scenario is best described as a payoff of zero risk to the seller beyond the premium received, which is a fixed amount and represents the maximum profit they can achieve.

Question 5

Selling a covered call is equivalent to

Accepted Answer

The answer of Selling a covered call is equivalent to
...

Question 6

The minimum payoff to the seller of a put is

Accepted Answer

The minimum payoff to the seller of a put is when the option is exercised, which means the buyer is selling the stock to the seller at the exercise price. Therefore, the seller's loss is equal to the exercise price.

Question 7

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's

Accepted Answer

The option's fixed price at which the owner can buy or sell the underlying asset is called the strike price. The other options listed are not the fixed price in an option contract.

Question 8

Stock option quotes are

Accepted Answer

Stock option quotes are typically based on a 100-share contract and quoted on a per-share basis. Therefore, choice E, which states that the quote is based on a 100-share contract with the quote stated on a per-share basis, is the correct choice.

Question 9

The seller of a call option makes the most profit when the option

Accepted Answer

The seller of a call option receives a premium upfront for selling the option. They make the most profit when the option expires without being exercised, as they get to keep the premium paid by the buyer without having to sell their shares. If the option is exercised immediately or converted into shares, the seller would have to sell their shares at a potentially lower price than the current market price, resulting in a loss. If the option is in the money, the seller may still make a profit, but it would not be as much as if the option expires without being exercised. If the option is not exercised until the expiration date, the seller would still make a profit, but it would depend on the difference between the strike price and the market price at the expiration date, which may be less than the amount of premium received.

Question 10

The ticker symbol for a stock option indicates all of the following except the

Accepted Answer

The ticker symbol for a stock option does not indicate the intrinsic value. The other options listed (underlying stock, expiration date, type of option, and strike price) are all included in the ticker symbol.

Question 11

An option that can only be exercised on the expiration date is referred to as

Accepted Answer

An option that can only be exercised on the expiration date is called a European option.

Question 12

The seller of a put option on 100 shares of stock makes the most profit when the

Accepted Answer

The seller of a put option profits most when the stock price remains above the exercise price, as the option is less likely to be exercised, allowing the seller to keep the premium without having to buy the stock at the exercise price.

Question 13

An ________ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price on the expiration date.

Accepted Answer

The answer of An ________ is a derivative security that...

Question 14

Carie opted to exercise her May option on April 3^rd and received $1,750 in exchange for her shares.She must have owned a(n)

Accepted Answer

An American put option allows the holder to sell shares at a specified price before or on the expiration date. Carie exercised her option early and received money, indicating she sold her shares, which aligns with an American put.

Question 15

The difference between an American call and a European call is that the American call

Accepted Answer

An American call option can be exercised at any time up to and including the expiration date, while a European call option can only be exercised on the expiration date. All other options listed are not correct.

Question 16

Which one of the following statements correctly describes your situation as the owner of an American call option?

Accepted Answer

As the owner of an American call option, you have the right (but not the obligation) to buy the underlying asset at a set price (strike price) at any time up to and including the expiration date of the option. Therefore, choice E is the correct statement.

Question 17

Eduardo owns an option that gives him the right to purchase shares of ABC stock at a price of $18 a share.Currently,the stock is selling for $21.60.He would like to profit on this stock but is not permitted to exercise his option for another 2 weeks.Contrary to other investors,he believes the stock price will decline significantly over the next 2 weeks.Given this situation,he should

Accepted Answer

If Eduardo believes that the stock price will decline significantly over the next 2 weeks, then there is no point in waiting to exercise his option as he would be buying the stock at a higher price than its expected value. Instead, he should sell his option today to lock in his profit of $3.60 per share ($21.60 - $18) and avoid the risk of a decline in the stock price. Therefore, option A is the best choice.

Question 18

The intrinsic value of a put is equal to the:

Accepted Answer

The intrinsic value of a put option is calculated as the greater of the strike price minus the stock price or zero. This represents the value of exercising the option at its current state, where if the stock price is below the strike price, the option has value, otherwise, its intrinsic value is zero.

Question 19

A 35 put option on FKL stock expires today.The current price of the stock is $36.The put is

Accepted Answer

The put option has a strike price of $35, and since the current price of the stock is $36, the option is out of the money. This means that exercising the option would not result in any profit for the holder.

Question 20

The seller of a European call option has the

Accepted Answer

The seller (writer) of a European call option has the obligation to sell the underlying stock at the strike price if the option is exercised by the buyer on the expiration date.

Quiz 17: Options and Corporate Finance