Question 1

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

Accepted Answer

E

Question 2

The price that the buyer of a put option pays to acquire the option is called the

Accepted Answer

The price that the buyer pays to acquire a put option is called the "premium." It is the amount that the buyer pays upfront to have the right to sell the underlying asset at a specified strike price. Therefore, the best choice is E - premium.

Question 3

The price that the writer of a call option receives to sell the option is called the

Accepted Answer

The correct term for the price that the writer of a call option receives is the premium. The strike price or exercise price is the price at which the underlying asset can be purchased, and the execution price or acquisition price refers to the price at which the option is exercised. Therefore, the only correct choice is E - premium.

Question 4

To adjust for stock splits

Accepted Answer

When a stock splits, the exercise price of the option needs to be adjusted to reflect the new price of the underlying stock. The exercise price is reduced by the factor of the split, so it remains proportional to the new price of the stock. The number of options held is increased by the same factor, to ensure that the value of the option remains the same. For example, if a stock splits 2-for-1, the exercise price of the option is halved, and the number of options held is doubled. This ensures that the option holder is not disadvantaged by the stock split.

Question 5

An American put option can be exercised

Accepted Answer

An American put option can be exercised any time on or before the expiration date. This means that the holder of the option has the right to sell the underlying asset at the strike price, regardless of the current market price, up until the expiration date. Therefore, the holder can choose when to exercise the option based on market conditions and their own investment strategy.

Question 6

A European call option can be exercised

Accepted Answer

The definition of a European call option is that it can only be exercised on the expiration date, hence it cannot be exercised any time in the future (A), if the price of the underlying asset declines below the exercise price (C), or immediately after dividends are paid (D).

Question 7

An American call option allows the buyer to

Accepted Answer

An American call option gives the buyer the right to buy the underlying asset at the exercise price on or before the expiration date. The buyer also has the option to sell the option in the open market prior to expiration, creating the possibility for profit even if the underlying asset has not yet reached the exercise price. Therefore, the correct answer is B and C.

Question 8

A European call option allows the buyer to

Accepted Answer

The answer of A European call option allows the buyer...

Question 9

A European put option can be exercised

Accepted Answer

A European put option can only be exercised on the expiration date.

Question 10

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

Accepted Answer

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is known as the strike price or the exercise price. Therefore, the best choice is D, which includes both A and B. Choices C and E are incorrect as there is no such thing as an execution price for a call option.

Question 11

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

Accepted Answer

The answer of The price that the buyer of a...

Question 12

The current market price of a share of AT&T stock is $50.If a call option on this stock has a strike price of $45,the call

Accepted Answer

A call option is "in the money" when the market price of the stock is above the strike price. Since $50 is above the $45 strike price, the call is in the money. Additionally, the call option would sell for a higher price when the market price is $50 compared to $40, as the intrinsic value is greater.

Question 13

The price that the buyer of a call option pays to acquire the option is called the

Accepted Answer

The price that the buyer of a call option pays to acquire the option is referred to as the premium. This is the amount that the buyer needs to pay upfront in order to have the right, but not the obligation, to buy the underlying asset at a specified strike price. The premium represents the cost of the option and is influenced by various factors, including the current price of the underlying asset, the time remaining until expiration, and the level of implied volatility in the market.

Question 14

All else equal,call option values are lower

Accepted Answer

Call option values are lower for high dividend payout policies because the payment of dividends reduces the value of the underlying asset, which in turn reduces the value of the option. Therefore, option buyers may be less willing to pay a premium for an option on a stock with a high-dividend payout policy. May has no significant impact on call option values.

Question 15

An American put option allows the holder to

Accepted Answer

An American put option gives the holder the right to sell the underlying asset at the striking price on or before the expiration date. This is useful for the holder if they believe the price of the asset will decrease in the future, as they will be able to sell the asset for a profit at the higher striking price. Option A is describing an American call option, while options C and D are not accurate descriptions of put options.

Question 16

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

Accepted Answer

The answer of The price that the writer of a...

Question 17

All else equal,call option values are higher

Accepted Answer

According to the Black-Scholes model, the higher the dividend payout, the lower the call option value. Therefore, call options are expected to have higher values for low dividend payout policies. There is no evidence to suggest that the month of May has any impact on call option values.

Question 18

An American call option can be exercised

Accepted Answer

An American call option can be exercised any time on or before the expiration date. This is one of the key differences between American and European options, as European options can only be exercised on the expiration date.

Question 19

A European put option allows the holder to

Accepted Answer

A European put option gives the holder the right to sell the underlying asset at the striking price only on the expiration date, not before.

Question 20

The price that the writer of a put option receives to sell the option is called the

Accepted Answer

The price that the writer of a put option receives to sell the option is called the premium. This is the amount paid by the buyer of the put option to the writer in exchange for the right to sell the underlying asset at the strike price at any time before the expiration date.

Quiz 20: Futures, swaps, and Risk Management