Deck 15: Options Markets

Question 1

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

Answer 1

D

Question 2

A quanto provides its holder with the right to ________.

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

Answer 2

D

Question 3

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)

Answer 3

C

Question 4

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 5

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI 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 6

You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI 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 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)

Question 8

A time spread may be executed by ________.

A) selling an option with one exercise price and buying a similar one with a different exercise price
B) buying two options that have the same expiration dates but different strike prices
C) selling two options that have the same expiration dates but different strike prices
D) selling an option with one expiration date and buying a similar option with a different expiration date

Question 9

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI 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 10

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

Question 11

Strips and straps are variations of ________.

A) straddles
B) collars
C) money spreads
D) time spreads

Question 12

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 13

Which of the following statements about convertible bonds are true?
I) The conversion price does not change over time.
II) The associated stocks may not pay dividends as long as the bonds are outstanding.
III) Most convertibles are also callable at the discretion of the firm.
IV) They may be thought of as straight bonds plus a call option.

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

Question 14

______ option can only be exercised on the expiration date.

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

Question 15

Longer-term American-style options with maturities of up to 3 years are called ________.

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

Question 16

The initial maturities of most exchange-traded options are generally ________.

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

Question 17

You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI 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 18

All else the same, an American-style option will be ________ valuable than a ________ style option.

A) more; European-
B) less; European-
C) more; Canadian-
D) less; Canadian-

Question 19

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)

Question 20

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)

Question 21

Exchange-traded stock options expire on the ________ of the expiration month.

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

Question 22

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 23

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 24

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 25

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 26

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you 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 27

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 28

Which one of the statements about margin requirements on option positions is not correct?

A) The margin required will be lower 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 29

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 30

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 31

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 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

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 34

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 35

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________.

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

Question 36

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

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

Question 37

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 38

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

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

Question 39

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 40

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 41

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 42

You buy one Huge-Packing August 50 call contract and one Huge-Packing 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 43

The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ________.

A) $1,980
B) $4,900
C) $5,000
D) $2,080

Question 44

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

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

Question 45

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 46

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance 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 47

You purchase one MBI 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 48

________ 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 49

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

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

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:

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 51

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 1 year, while warrants have an initial maturity less than 1 year.
D) Call options may be convertible into the stock, while warrants are not convertible into the stock.

Question 52

Which of the following expressions represents the value of a call option to its holder on the expiration date?

A) ST − X if ST > X, 0 if ST ≤ X
B) − (ST − X) if ST > X, 0 if ST ≤ X
C) 0 if ST ≥ X, X − ST if ST < X
D) 0 if ST ≥ X, − (X − ST) if ST < X

Question 53

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 (buy the 45 call and sell the 55 call) would be ________.

A) $300
B) −$400
C) $150
D) $50

Question 54

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 55

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is ________ in August.

A) either lower than $44.25 or higher than $55.75
B) between $44.25 and $55.75
C) higher than $55.75
D) lower than $44.25

Question 56

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 57

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 58

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; $3.50
B) $33; $31.50
C) $35; $3.50
D) $35; $35

Question 59

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 60

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 ________ option.

A) an American
B) a European
C) an Asian
D) an Australian

Question 61

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 62

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 63

A covered call strategy benefits from what environment?

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

Question 64

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 65

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 3 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 3 months?

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

Question 66

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 67

You sell one MBI 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 MBI stock sells for $95 per share. You will realize a ________ on this strip.

A) $300 profit
B) $100 loss
C) $500 profit
D) $200 profit

Question 68

You are convinced that a stock's price will move by at least 15% over the next 3 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 69

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 3 months. The price of a 3-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 70

Which of the following strategies makes a profit when 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 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

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

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 3 months. The price of a 3-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

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 75

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 3 months. The price of a 3-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 76

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 3 months. The price of a 3-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 77

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 78

An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?

A) $32.50
B) $35
C) $37.50
D) $37.60

Question 79

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 $.85, what is the break-even point for the investor?

A) $24.15
B) $25
C) $25.87
D) $27.86

Question 80

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