Question 1

A foreign currency option contract traded on US exchanges allows for the sale or purchase of a set amount of
A) US currency at a floating exchange rate.
B) US currency at a fixed exchange rate.
C) foreign currency at a floating exchange rate.
D) foreign currency at a fixed exchange rate.
E) none of the above.

Accepted Answer

A foreign currency option contract allows for the sale or purchase of a set amount of foreign currency at a fixed exchange rate. This means that the buyer or seller has the right, but not the obligation, to buy or sell the foreign currency at the agreed-upon fixed exchange rate, regardless of any fluctuations in the actual exchange rate.

Question 2

The value of a call option is positively related to
A) underlying stock price.
B) time to expiration
C) exercise price.
D) a and b
E) b and c

Accepted Answer

The value of a call option is positively related to the underlying stock price and time to expiration. When the underlying stock price increases, the call option becomes more valuable as it gives the holder the right to buy the stock at a lower exercise price. Similarly, as the time to expiration increases, the likelihood of the stock price increasing and the call option becoming profitable also increases. The exercise price is negatively related to the value of a call option, meaning that as the exercise price increases, the call option becomes less valuable. Therefore, the correct answer is D, as it includes the two factors that are positively related to the value of a call option.

Question 3

Consider the following information on put and call options for Abel Group  Calculate the net value of a protective put position at a stock price at expiration of €20, and a stock price at expiration of €45.
A) €6.35, €18.85
B) €29.65, €42.15
C) €21.65, €34.15
D) €8, €8
E) −€8, −€8

Accepted Answer

B

Question 4

A vertical spread involves buying and selling call options in the same stock with
A) a different time period but same price.
B) a different time period and different price.
C) the same time period and price.
D) the same time period but different price.
E) options in different markets.

Accepted Answer

A vertical spread involves buying and selling call options in the same stock with the same time period but different prices. This strategy can be used to limit risk and potentially increase profit potential.

Question 5

Refer to the previous question. Calculate the price of the put option.
A) €1.086
B) €0.862
C) €6.234
D) €0.623
E) €2.317

Accepted Answer

The correct answer is A because the put option is in-the-money, so its price is equal to the difference between the strike price and the stock price, which is €1.086.

Question 6

In the Black-Scholes model N(d1) represents the
A) hedge ratio.
B) partial derivative of the call's value with respect to the stock price.
C) change in the option's value given a one dollar change in the underlying security's price.
D) Option's delta.
E) all of the above.

Accepted Answer

N(d1) represents the option's delta, which is the hedge ratio, the partial derivative of the call's value with respect to the stock price, and the change in the option's value given a one dollar change in the underlying security's price.

Question 7

In the Black-Scholes option pricing model, an increase in security price (S) will cause
A) an increase in call value and an increase in put value.
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.

Accepted Answer

According to the Black-Scholes model, an increase in the security price (S) will lead to an increase in the value of a call option as the likelihood of the option being in the money at expiration increases. On the other hand, an increase in the security price results in a decrease in the value of a put option as it becomes less likely that the option will be exercised, leading to a decrease in the value of the option. Therefore, an increase in security price will cause an increase in call value and a decrease in put value, making choice B the best answer.

Question 8

A stock currently trades for €130 per share. Options on the stock are available with a strike price of €125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35. Use the Black-Scholes option pricing model to calculate the price of a call option.
A) €5.19
B) €4.35
C) €3.93
D) €6.19
E) €8.17

Accepted Answer

The answer of A stock currently trades for €130 per...

Question 9

In a money spread, an investor would
A) Buy two out-of-the-money call options on the same stock with different exercise dates.
B) Buy two in-the-money call options on the same stock with different exercise dates.
C) Sell two out-of-the-money call options on the same stock with different exercise dates.
D) Sell two in-the-money call options on the same stock with different exercise dates.
E) Sell an out-of-the-money call and purchase an in-the-money call on the same stock with the same exercise date.

Accepted Answer

The answer of In a money spread, an investor would
A)...

Question 10

Assume that you have just sold a stock for a loss at a price of £75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of £70 and a price of £6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is £65.
A) £71.75
B) £76.75
C) £58.25
D) £81.75
E) None of the above

Accepted Answer

The effective price is 65 + 6.75 = $71.75
The option expires worthless so your effective price is the current price plus the option premium.

Question 11

If you were to purchase an October option with an exercise price of 50 for 8 and simultaneously sell an October option with an exercise price of 60 for 2, you would be
A) bullish and taking a high risk.
B) bullish and conservative.
C) bearish and taking a high risk.
D) bearish and conservative.
E) neutral.

Accepted Answer

This strategy is known as a bull call spread, which involves buying a call option with a lower strike price (in this case, 50) and selling a call option with a higher strike price (in this case, 60). The goal is to profit from a moderate increase in the price of the underlying asset. It is considered a bullish strategy because it benefits from a rise in the asset's price, but it is also conservative because the premium received from selling the higher strike call option reduces the overall cost of the trade, thus limiting the maximum loss compared to buying a single call option outright.

Question 12

The Black-Scholes model assumes that stock price movements can be described by
A) geometric moving averages.
B) arithmetic moving averages.
C) regression towards the mean.
D) geometric Brownian motion.
E) stochastic time lags.

Accepted Answer

The Black-Scholes model assumes that stock price movements can be described by geometric Brownian motion. The model assumes that the stock price follows a log-normal distribution and the rate of change of the stock price follows a normal distribution.

Question 13

If the hedge ratio is 0.50, this indicates that the portfolio should hold
A) two shares of stock for every call option written.
B) one share of stock for every two call options written.
C) two shares of stock for every call option purchased.
D) one share of stock for every two call options purchased.
E) two call options for every put option written.

Accepted Answer

The answer of If the hedge ratio is 0.50, this...

Question 14

A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
A) the same expiration date but different exercise prices.
B) the same exercise price but different expiration dates.
C) different exercise prices and different expiration dates.
D) the same exercise price and the same expiration month.
E) traded in different markets.

Accepted Answer

A calendar spread involves buying and selling options with different expiration dates. Therefore, A, C, D, and E are incorrect choices. Option B is the correct choice as it involves purchasing and selling options with the same exercise price but different expiration dates.

Question 15

Options on futures contracts are very popular because
A) they require the holder to purchase at a future date.
B) of their ability to create leverage.
C) the seller of the futures contract is under no obligation.
D) the amount of the underlying commodity is negotiable.
E) none of the above.

Accepted Answer

Options on futures contracts are popular because they offer leverage, allowing traders to control a larger amount of the underlying asset with a smaller amount of capital. The other answer choices are not accurate explanations for why options on futures contracts are popular.

Quiz 19: Option Contracts

A foreign currency option contract traded on US exchanges allows for the sale or purchase of a set amount of

The value of a call option is positively related to

Consider the following information on put and call options for Abel Group Calculate the net value of a protective put position at a stock price at expiration of €20, and a stock price at expiration of €45.

A vertical spread involves buying and selling call options in the same stock with

Refer to the previous question. Calculate the price of the put option.

In the Black-Scholes model N(d1) represents the

In the Black-Scholes option pricing model, an increase in security price (S) will cause

In a money spread, an investor would

If you were to purchase an October option with an exercise price of 50 for 8 and simultaneously sell an October option with an exercise price of 60 for 2, you would be

The Black-Scholes model assumes that stock price movements can be described by

If the hedge ratio is 0.50, this indicates that the portfolio should hold

A calendar spread requires the purchase and sale of two calls or two puts in the same stock with

Options on futures contracts are very popular because