Question 1

An American call option can be exercised

Accepted Answer

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. 
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 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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. 
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 4

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?

Accepted Answer

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

Question 5

All else equal, call option values are lower

Accepted Answer

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. 
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 6

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

Accepted Answer

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. 
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 7

The Option Clearing Corporation is owned by

Accepted Answer

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. 
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.

Question 8

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

Accepted Answer

A) a vertical spread. 
B) a straddle. 
C) a time spread. 
D) a collar. 
A) a vertical spread. 
B) a straddle. 
C) a time spread. 
D) a collar.

Question 9

Currency-translated options have

Accepted Answer

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. 
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.

Question 10

A European put option can be exercised

Accepted Answer

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 
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

Question 11

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?

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

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. 
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 14

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

Accepted Answer

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. 
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 15

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 ________.

Accepted Answer

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

Question 16

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?

Accepted Answer

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

Question 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

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. 
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 19

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

Accepted Answer

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. 
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 20

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?

Accepted Answer

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

Exam 20: Options Markets: Introduction

An American call option can be exercised

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

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

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?

All else equal, call option values are lower

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

The Option Clearing Corporation is owned by

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

Currency-translated options have

A European put option can be exercised

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?

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

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

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 ________.

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?

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

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

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

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?

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

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 .