Question 1

There are four basic option positions: buying a call option, selling a call option, buying a put option, and selling a put option.

Accepted Answer

This is true. These are the four basic types of option positions in options trading.

Question 2

Differentiate between a call option and a put option.

Accepted Answer

The answer of Differentiate between a call option and a...

Question 3

Options may be traded either on an organized exchange or in the over-the-counter market.

Accepted Answer

Options can be traded both on organized exchanges such as the Chicago Board Options Exchange (CBOE) and in the over-the-counter (OTC) market.

Question 4

Exchange-traded options on futures that are based on debt instruments have been far less popular than exchange-traded options on physicals.

Accepted Answer

The answer of Exchange-traded options on futures that are based...

Question 5

There has been decreased use by institutional investors of over-the-counter options on Treasury and mortgage-backed securities.

Accepted Answer

Institutional investors have increasingly used over-the-counter options on Treasury and mortgage-backed securities as a means to hedge against interest rate fluctuations and to take speculative positions, reflecting a trend towards more sophisticated investment strategies and risk management practices.

Question 6

In determining the payoff from an option, the time value of money as a result of having to finance the option price must be considered.

Accepted Answer

The time value of money is a concept that recognizes the impact of the time on the value of money. When the option price has to be financed, the investor must consider the cost of financing and the impact it will have on the option's payoff. Therefore, the time value of money must be considered in determining the payoff from an option.

Question 7

There are interest rate options in which the underlying is a debt instrument (called an option on a physical) and a futures contract (called a futures option).

Accepted Answer

Interest rate options can have underlying assets that are debt instruments or futures contracts, which can be referred to as options on a physical or futures options, respectively.

Question 8

If the buyer of the futures option exercises, the futures price for the futures contract will be set equal to the exercise price, but the position of the two parties is then immediately marked to market based on the then-current futures price.

Accepted Answer

This statement is true. When the buyer exercises a futures option, the futures price is set equal to the exercise price, but the position is immediately marked to market based on the current futures price. This means that any gains or losses since the option was purchased will be settled and the new position is based on the current market value of the futures contract.

Question 9

Simple OTC options are called exotic options.

Accepted Answer

Exotic options are complex OTC options that have non-standard features, while simple OTC options are known as plain vanilla options.

Question 10

Options have a symmetric risk/reward relationship, while futures do not because the buyer of an option retains all the potential benefits, but the gain is always reduced by the amount of the option price.

Accepted Answer

This statement is incorrect. Options do not have a symmetric risk/reward relationship, as the potential loss for the buyer of an option is limited to the premium paid, while the potential gain is unlimited. Futures, on the other hand, have a symmetric risk/reward relationship as both the buyer and seller have equal potential for gain or loss.

Question 11

There are options traded on individual shares of common stock and options traded on common stock indexes.

Accepted Answer

This statement is true. Options can be traded on individual shares of common stock and also on common stock indexes like the S&P 500 or the Dow Jones Industrial Average.

Question 12

An option cannot be used to alter the risk/reward relationship from that of a position in the underlying.

Accepted Answer

Options can be used to alter the risk/reward relationship from that of a position in the underlying asset by providing strategic choices such as hedging, leveraging, or income generation, which can modify the potential outcomes and risks.

Question 13

A call option gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option.

Accepted Answer

A call option gives the buyer the right to buy a designated futures contract at a designated price at any time during the life of the option, not to sell to the writer.

Question 14

Like a futures contract, only one party to an option contract is obligated to transact at a later date: the option writer.

Accepted Answer

The answer of Like a futures contract, only one party...

Question 15

The buyer of a call option benefits if the price of the underlying is unchanged or falls.

Accepted Answer

The buyer of a call option benefits if the price of the underlying asset increases. This allows them to buy the asset at a lower price and sell it for a higher price, or simply sell the option for a profit. If the price of the underlying asset falls or remains unchanged, the buyer of the call option will not benefit and may even experience a loss if the cost of the option exceeds any potential gains from exercising it.

Question 16

Hedging with options allows the option buyer to limit risk but not maintain the potential to benefit from a favorable price movement.

Accepted Answer

Hedging with options allows the option buyer to limit risk while still maintaining the potential to benefit from favorable price movements, as they are not obligated to exercise the option if the market moves in their favor.

Question 17

Comment on the differences between futures and options contracts.

Accepted Answer

The answer of Comment on the differences between futures and...

Question 18

Options allow the investor to mold a risk/return relationship.

Accepted Answer

Options provide the investor with the ability to customize the risk and return characteristics of their investment strategy through the use of different options contracts, strike prices, and expiration dates. This flexibility allows investors to potentially maximize returns while minimizing risk to better align with their investment goals and risk tolerance.

Question 19

The dollar value of a stock index option contract is equal to the index value divided by the contract's multiple.

Accepted Answer

The dollar value of a stock index option contract is equal to the index value multiplied by the contract's multiple.

Question 20

The buyer of a put option benefits if the price of the underlying is unchanged or rises.

Accepted Answer

The buyer of a put option benefits if the price of the underlying asset decreases, while they could potentially lose money if the underlying price remains unchanged or increases.

Quiz 27: Options Markets