Question 1

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

Accepted Answer

The Chicago Board Options Exchange (CBOE) is the largest and most dominant organized options exchange, where options on individual stocks, indices, and other securities are traded.

Question 2

An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree that the firm's stock price may increase to $45 per share in the next 4 months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. At what stock price would the investor break even?
A) $35
B) $40
C) $42
D) $45

Accepted Answer

If the investor buys 500 shares at $32 per share, the total investment cost will be:
500 shares x $32 per share = $16,000

If the stock price increases to $45 per share, the investor will make a profit of:
500 shares x ($45 - $32) per share = $6,500

Alternatively, if the investor buys a call option for $5,000, the total investment cost will be:
$5,000

To break even, the stock price needs to increase enough to cover the cost of the call option. This means the stock price needs to be at least:
$30 (strike price) + $5 (cost of option) = $35

Therefore, the investor would break even at a stock price of $35 when purchasing the call option. However, if the stock price increases to $40 or beyond, the investor would make a larger profit with the call option than by purchasing the stock outright.

Question 3

Options are the most popular type of ________.
A) derivative security
B) hybrid security
C) convertible security
D) fixed interest bearing security

Accepted Answer

Options are a type of derivative security, meaning their value is derived from the value of an underlying asset, such as a stock or commodity. They are not hybrid securities, convertible securities, or fixed interest bearing securities.

Question 4

A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

Accepted Answer

This is correct. The strike price is the predetermined price at which the holder of a call option has the right (but not the obligation) to buy the underlying asset (usually a stock) at any time before the option's expiration date.

Question 5

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall.
A) put; call; Puts
B) call; put; Puts
C) put; call; Calls
D) call; put; Calls

Accepted Answer

A call option gives the holder the right to buy a stock at a specified price, while a put option gives the holder the right to sell a stock at a specified price. Puts are bought when a decline in the stock price is anticipated.

Question 6

An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree that the firm's stock price may increase to $45 per share in the next four months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. What profit would the investor realize if the stock price increased to $42 per share?
A) $0
B) $1,000
C) $4,000
D) $6,000

Accepted Answer

If the investor buys the 500 shares at $32 per share, the investment will cost $16,000. If the stock price increases to $42 per share, the investment will be worth $21,000 (500 shares x $42 per share), resulting in a profit of $5,000.

Alternatively, if the investor buys the call option for $5,000, and the stock price increases to $42 per share, the option will be worth $12 per share (42 – 30), resulting in a profit of $7,200 (500 shares X $12 per share - $5,000 option cost).

Therefore, the best choice for the investor would be to purchase the call option and realize a profit of $7,200 if the stock price increases to $42 per share.

Question 7

Which of the following is true of call and put options?
A) Options are issued by private firms.
B) The presence of options trading in a firm's stock could increases the firm's share price.
C) Options are a source of funding to a corporation.
D) Call options help to manage downside risk and put options help to manage upside risk.

Accepted Answer

The answer of Which of the following is true of...

Question 8

An option buyer who expects a stock price to decline will purchase a put option.

Accepted Answer

This is true. A put option gives the holder the right, but not the obligation, to sell a specified quantity of an underlying asset at a predetermined price (strike price) within a specified time period. If the stock price declines, the put option becomes more valuable, allowing the holder to sell the stock at the higher strike price and make a profit.

Question 9

The dominant organized options exchange is the ________.
A) over-the-counter exchange
B) CBOE
C) NASDAQ
D) NYSE

Accepted Answer

The Chicago Board Options Exchange (CBOE) is the dominant organized options exchange.

Question 10

A firm can raise capital by issuing securities such as convertibles and warrants but a firm has nothing to do with the creation of options to raise capital.

Accepted Answer

Options are derivatives traded between investors in the market, and firms do not issue options to raise capital. Convertibles and warrants, on the other hand, are issued by firms directly as a means to raise funds.

Question 11

Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall.

Accepted Answer

This statement is true. Call options give the buyer the right to purchase the underlying security at a specified strike price, and the buyer benefits if the market price of the security rises above the strike price. On the other hand, put options give the buyer the right to sell the underlying security at a specified strike price, and the buyer benefits if the market price of the security falls below the strike price. Therefore, call options are bought with bullish expectations while put options are bought with bearish expectations.

Question 12

A call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

Accepted Answer

A call option is an option to buy a specified number of shares of a stock on or before some future date at a stated price. It is not an option to sell shares.

Question 13

Call options are sold with the expectation that the market price of the underlying security will fall while put options are sold with the expectation that the market price of the underlying security will rise.

Accepted Answer

Call options are sold with the expectation that the market price of the underlying security will rise, while put options are sold with the expectation that the market price of the underlying security will fall.

Question 14

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $800.
B) There would be a profit of $400.
C) There would be a loss of $400.
D) There would be a loss of $800.

Accepted Answer

The investor has the right to sell 100 shares of the underlying stock at the exercise price of $40 per share, even though the current market price is only $32 per share. This means they can sell their 100 shares for a total of $4,000 (100 shares x $40 per share).

However, the investor paid $400 for the put option, so their net profit would be $3,600 ($4,000 - $400). This represents a profit of $400.

Question 15

Which of the following statements about put and call options is true?
A) They are traded only over-the-counter.
B) They are a form of deferred equity financing by a firm.
C) They can be used to lock in a gain or prevent a loss on a stock holding.
D) They provide the seller with an opportunity to earn larger returns than simply buying or selling common stock.

Accepted Answer

Put and call options can be used by investors to lock in a gain or prevent a loss on a stock holding. They allow the buyer the right, but not the obligation, to purchase or sell the underlying asset at a predetermined price within a certain timeframe. They can be traded both over-the-counter and on exchanges. Option trading does not necessarily provide the seller with larger returns than buying or selling common stock. Option trading involves risks, including the potential loss of the entire premium paid.

Question 16

For puts and calls, the exercise price is called ________.
A) the expected value
B) the market price of the stock
C) the strike price
D) the option price

Accepted Answer

The exercise price is also known as the strike price, which is the price at which the option holder can buy or sell the underlying asset. It is not the expected value, market price of the stock, or option price.

Question 17

If an investor buys a 100-share call option for $250 with an exercise price of $60 and the underlying price per share of the stock at expiration is $66, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $350.
B) There would be a profit of $600.
C) There would be a profit of $250.
D) There would be a loss of $250.

Accepted Answer

The profit is calculated by taking the difference between the stock's price at expiration ($66) and the exercise price ($60), which equals $6 per share. For 100 shares, this amounts to $600. Subtracting the initial cost of the option ($250) from this gives a profit of $350.

Question 18

The option buyer who expects a stock price to decline will purchase ________.
A) a call
B) a warrant
C) a put
D) a convertible bond

Accepted Answer

The option that gives the buyer the right to sell a stock at a certain price, which becomes favorable if the stock price decreases, is called a put option. Therefore, the option buyer who expects a stock price to decline will purchase a put option.

Question 19

A firm can raise capital by issuing securities such as convertibles, warrants, and calls and puts.

Accepted Answer

A firm can raise capital by issuing securities like stocks and bonds, but calls and puts are options, which are derivatives and not directly used by firms to raise capital.

Question 20

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $200.
B) There would be a profit of $100.
C) There would be a loss of $100.
D) There would be a loss of $300.

Accepted Answer

The investor pays $300 for the option. At expiration, the stock price is $32, so the option is exercised at $30, giving a profit of ($32 - $30) * 100 = $200. Subtracting the $300 cost of the option, the net result is a loss of $100.

Quiz 17: Hybrid and Derivative Securities

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

Options are the most popular type of ________.

A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

Which of the following is true of call and put options?

An option buyer who expects a stock price to decline will purchase a put option.

The dominant organized options exchange is the ________.

A firm can raise capital by issuing securities such as convertibles and warrants but a firm has nothing to do with the creation of options to raise capital.

Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall.

A call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

Call options are sold with the expectation that the market price of the underlying security will fall while put options are sold with the expectation that the market price of the underlying security will rise.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Which of the following statements about put and call options is true?

For puts and calls, the exercise price is called ________.

If an investor buys a 100-share call option for $250 with an exercise price of $60 and the underlying price per share of the stock at expiration is $66, what is the amount of profit or loss, ignoring brokerage fees?

The option buyer who expects a stock price to decline will purchase ________.

A firm can raise capital by issuing securities such as convertibles, warrants, and calls and puts.

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?