Deck 20: Options Markets: Introduction

Question 1

To adjust for stock splits

A)the exercise price of the option is reduced by the factor of the split, and the number of options held is increased by that factor.
B)the exercise price of the option is increased by the factor of the split, and the number of options held is reduced by that factor.
C)the exercise price of the option is reduced by the factor of the split, and the number of options held is reduced by that factor.
D)the exercise price of the option is increased by the factor of the split, and the number of options held is increased by that factor.

Answer 1

A

Question 2

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

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Answer 2

E

Question 3

An American call option can be exercised

A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.

Answer 3

A

Question 4

The current market price of a share of CAT stock is $76.If a call option on this stock has a strike price of $76, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options are correct.

Question 5

A European put option allows the holder to

A)buy the underlying asset at the striking price on or before the expiration date.
B)sell the underlying asset at the striking price on or before the expiration date.
C)potentially benefit from a stock price increase.
D)sell the underlying asset at the striking price on the expiration date.

Question 6

An American call option allows the buyer to

A)sell the underlying asset at the exercise price on or before the expiration date.
B)buy the underlying asset at the exercise price on or before the expiration date.
C)sell the option in the open market prior to expiration.
D)sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.
E)buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

Question 7

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

A)strike price.
B)exercise price.
C)execution price.
D)strike price or exercise price.

Question 8

An American put option can be exercised

A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.

Question 9

A European put option can be exercised

A)any time in the future.
B)only on the expiration date.
C)if the price of the underlying asset declines below the exercise price.
D)immediately after dividends are paid. European options can be exercised at expiration only.

Question 10

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

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Question 11

The current market price of a share of Disney stock is $60.If a call option on this stock has a strike price of $65, the call

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.

Question 12

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

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Question 13

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

A)premium.
B)exercise price.
C)execution price.
D)acquisition price.

Question 14

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

A)strike price.
B)exercise price.
C)execution price.
D)strike price or execution price.
E)strike price or exercise price.

Question 15

All else equal, call option values are higher

A)in the month of May.
B)for low dividend-payout policies.
C)for high dividend-payout policies.
D)in the month of May and for low dividend-payout policies.

Question 16

All else equal, call option values are lower

A)in the month of May.
B)for low dividend-payout policies.
C)for high dividend-payout policies.
D)in the month of May and for low dividend-payout policies.

Question 17

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

A)strike price.
B)exercise price.
C)execution price.
D)strike price or execution price.
E)strike price or exercise price.

Question 18

An American put option allows the holder to

A)buy the underlying asset at the striking price on or before the expiration date.
B)sell the underlying asset at the striking price on or before the expiration date.
C)potentially benefit from a stock price increase.
D)sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

Question 19

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

A)strike price.
B)exercise price.
C)execution price.
D)strike price or exercise price.
E)None of the options are correct.

Question 20

A European call option can be exercised

A)any time in the future.
B)only on the expiration date.
C)if the price of the underlying asset declines below the exercise price.
D)immediately after dividends are paid. European options can be exercised at expiration only.

Question 21

The current market price of a share of a stock is $20.If a put option on this stock has a strike price of $18, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the strike price of the put option was $23.
D)is out of the money and sells for a higher price than if the strike price of the put option was $23.

Question 22

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options are correct.

Question 23

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

A)is out of the money.
B)is in the money.
C)sells for a lower price than if the market price of AT&T stock is $40.
D)is out of the money and sells for a lower price than if the market price of AT&T stock is $40.

Question 24

The current market price of a share of CSCO stock is $22.If a put option on this stock has a strike price of $20, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the strike price of the put option was $25.
D)is out of the money and sells for a higher price than if the strike price of the put option was $25.

Question 25

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position?

A)$65
B)$75
C)$5
D)$70

Question 26

A put option on a stock is said to be out of the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 27

The maximum loss a buyer of a stock put option can suffer is equal to

A)the striking price minus the stock price.
B)the stock price minus the value of the call.
C)the put premium.
D)the stock price.

Question 28

Barrier options have payoffs that

A)have payoffs that only depend on the minimum price of the underlying asset during the life of the option.
B)depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.
C)are known in advance.
D)have payoffs that only depend on the maximum price of the underlying asset during the life of the option. Barrier options have payoffs that depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

Question 29

A put option on a stock is said to be in the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 30

A call option on a stock is said to be at the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 31

A call option on a stock is said to be out of the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 32

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the market price of Boeing stock is $70.
D)is out of the money and sells for a higher price than if the market price of Boeing stock is $70.

Question 33

The current market price of a share of MSI stock is $24.If a call option on this stock has a strike price of $24, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options are correct.

Question 34

A put option on a stock is said to be at the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 35

Currency-translated options have

A)only asset prices denoted in a foreign currency.
B)only exercise prices denoted in a foreign currency.
C)payoffs that only depend on the maximum price of the underlying asset during the life of the option.
D)either asset or exercise prices denoted in a foreign currency. Currency-translated options have either asset or exercise prices denoted in a foreign currency.

Question 36

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

A)limited.
B)unlimited.
C)increasing when the stock price is decreasing.
D)equal to the call premium.

Question 37

Lookback options have payoffs that

A)depend in part on the minimum or maximum price of the underlying asset during the life of the option.
B)only depend on the minimum price of the underlying asset during the life of the option.
C)only depend on the maximum price of the underlying asset during the life of the option.
D)are known in advance. Lookback options have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option.

Question 38

The maximum loss a buyer of a stock call option can suffer is equal to

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

Question 39

A call option on a stock is said to be in the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.

Question 40

The lower bound on the market price of a convertible bond is

A)its straight-bond value.
B)its crooked-bond value.
C)its conversion value.
D)its straight-bond value and its conversion value.

Question 41

You purchase one September 50 put contract for a put premium of $2.What is the maximum profit that you could gain from this strategy?

A)$4,800
B)$200
C)$5,000
D)$5,200

Question 42

You purchase one IBM 200 call option for a premium of $6.Ignoring transaction costs, the break-even price of the position is

A)$194.
B)$228.
C)$206.
D)$211. +200 + $6 = $206.

Question 43

The value of a stock put option is positively related to

A)the time to expiration.
B)the striking price.
C)the stock price.
D)the time to expiration and the striking price.

Question 44

Buyers of call options __________ required to post margin deposits, and sellers of put options __________ required to post margin deposits.

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

Question 45

You purchase one IBM March 200 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy?

A)$20,000
B)$20,600
C)$19,400
D)$19,000

Question 46

A protective put strategy is

A)a long put plus a long position in the underlying asset.
B)a long put plus a long call on the same underlying asset.
C)a long call plus a short put on the same underlying asset.
D)a long put plus a short call on the same underlying asset.

Question 47

The Option Clearing Corporation is owned by

A)the Federal Reserve System.
B)the exchanges on which stock options are traded.
C)the major U.S.banks.
D)the Federal Deposit Insurance Corporation. The exchanges on which options are traded jointly own the Option Clearing Corporation in order to facilitate option trading.

Question 48

You purchased one AT&T March 50 call and sold one AT&T March 55 call.Your strategy is known as

A)a long straddle.
B)a horizontal spread.
C)a money spread.
D)a short straddle.

Question 49

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy?

A)$7,000
B)$400
C)$7,400
D)$6,600

Question 50

All of the following factors affect the price of a stock option except

A)the risk-free rate.
B)the riskiness of the stock.
C)the time to expiration.
D)the expected rate of return on the stock.

Question 51

You purchased one AT&T March 50 put and sold one AT&T April 50 put.Your strategy is known as

A)a vertical spread.
B)a straddle.
C)a time spread.
D)a collar. A time spread involves the simultaneous purchase and sale of options with different expiration dates, same exercise price.

Question 52

You purchase one JNJ 75 call option for a premium of $3.Ignoring transaction costs, the break-even price of the position is

A)$75.
B)$72.
C)$3.
D)$78. +75 + $3 = $78.

Question 53

Suppose the price of a share of Google stock is $500.An April call option on Google stock has a premium of $5 and an exercise price of $500.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

A)increases to $504.
B)decreases to $490.
C)increases to $506.
D)decreases to $496.

Question 54

Buyers of put options anticipate the value of the underlying asset will __________, and sellers of call options anticipate the value of the underlying asset will ________.

A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease

Question 55

A covered call position is

A)the simultaneous purchase of the call and the underlying asset.
B)the purchase of a share of stock with a simultaneous sale of a put on that stock.
C)the short sale of a share of stock with a simultaneous sale of a call on that stock.
D)the purchase of a share of stock with a simultaneous sale of a call on that stock.

Question 56

Before expiration, the time value of a call option is equal to

A)zero.
B)the actual call price minus the intrinsic value of the call.
C)the intrinsic value of the call.
D)the actual call price plus the intrinsic value of the call. The difference between the actual call price and the intrinsic value is the time value of the option, which should not be confused with the time value of money.The option's time value is the difference between the option's price and the value of the option were the option expiring immediately.

Question 57

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

A)the call value plus the present value of the exercise price plus the stock price.
B)the call value plus the present value of the exercise price minus the stock price.
C)the present value of the stock price minus the exercise price minus the call price.
D)the present value of the stock price plus the exercise price minus the call price.

Question 58

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

A)increases to $204.
B)decreases to $190.
C)increases to $206.
D)decreases to $196.

Question 59

You write one AT&T February 50 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position?

A)$50
B)$55
C)$45
D)$40

Question 60

The value of a stock put option is positively related to the following factors except

A)the time to expiration.
B)the striking price.
C)the stock price.
D)All of the options are correct.

Question 61

A collar with a net outlay of approximately zero is an options strategy that

A)combines a put and a call to lock in a price range for a security.
B)uses the gains from sale of a call to purchase a put.
C)uses the gains from sale of a put to purchase a call.
D)combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put.

Question 62

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

A)$500.
B)$300.
C)$800.
D)$200.

Question 63

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even?

A)$101
B)$102
C)$103
D)$104

Question 64

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

A)$200.
B)$300.
C)zero.
D)$500.

Question 65

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to

A)$52.
B)$60.
C)$68.
D)either $52 or $68.

Question 66

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your strategy is called

A)a short straddle.
B)a long straddle.
C)a horizontal straddle.
D)a covered call.

Question 67

Asian options differ from American and European options in that

A)they are only sold in Asian financial markets.
B)they never expire.
C)their payoff is based on the average price of the underlying asset.
D)they are only sold in Asian financial markets and they never expire.

Question 68

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45.If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call?

A)$4.38
B)$5.60
C)$6.23
D)$12.26

Question 69

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

A)$500.
B)$300.
C)zero.
D)$200.

Question 70

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 90 call contract is

A)$4.1250.
B)$418.00.
C)$412.50.
D)$158.00.

Question 71

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum potential profit of your strategy is ________, if both options are exercised.

A)$600
B)$500
C)$200
D)$300

Question 72

A callable bond should be priced the same as

A)a convertible bond.
B)a straight bond plus a put option.
C)a straight bond plus a call option.
D)a straight bond plus warrants.

Question 73

Financial engineering

A)is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security.
B)primarily takes place for the institutional investor.
C)primarily takes places for the individual investor.
D)is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for the institutional investor.

Question 74

The following price quotations were taken from the Wall Street Journal. The premium on one February 90 call contract is

A)$3.1250.
B)$318.00.
C)$312.50.
D)$58.00.

Question 75

The put-call parity theorem

A)represents the proper relationship between put and call prices.
B)allows for arbitrage opportunities if violated.
C)may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.
D)All of the options are correct.

Question 76

Trading in "exotic options" takes place primarily

A)on the New York Stock Exchange.
B)in the over-the-counter market.
C)on the American Stock Exchange.
D)in the primary marketplace.

Question 77

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100.If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?

A)$17.50
B)$15.26
C)$10.36
D)$12.26

Question 78

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 85 call contract is

A)$8.875.
B)$887.50.
C)$412.50.
D)$158.00.

Question 79

Top Flight Stock currently sells for $53.A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%.What is the price of a one-year put with strike price of $58?

A)$10.00
B)$12.12
C)$16.00
D)$11.98

Question 80

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%.What is the price of a one-year put with strike price of $55?

A)$9.00
B)$12.89
C)$16.00
D)$18.72