Question 1

To adjust for stock splits

Accepted Answer

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. 
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.

Question 2

An American put 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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Question 3

You purchased one Coca Cola March 50 call and sold one Coca Cola 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. 
E)  None of the options are correct. 
A)  a long straddle. 
B)  a horizontal spread. 
C)  a money spread. 
D)  a short straddle. 
E)  None of the options are correct.

Question 4

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

Accepted Answer

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. 
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.

Question 5

Which of the following factors affect the price of a stock option?

Accepted Answer

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 
E)  The risk-free rate, riskiness of the stock, and time to expiration 
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 
E)  The risk-free rate, riskiness of the stock, and time to expiration

Question 6

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 7

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

Accepted Answer

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. 
E)  is in the money and can be exercised profitably. 
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. 
E)  is in the money and can be exercised profitably.

Question 8

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. 
E)  the price of the call is higher than the price of the put. 
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. 
E)  the price of the call is higher than the price of the put.

Question 9

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

Accepted Answer

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

Question 10

The current market price of a share of IBM 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 11

The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put

Accepted Answer

A)  is in the money. 
B)  is at the money. 
C)  sells for a lower price than if the market price of the stock is $75. 
D)  is in the money and sells for a lower price than if the market price of the stock is $75. 
E)  is out of the money and sells for a lower price than if the market price of the stock is $75. 
A)  is in the money. 
B)  is at the money. 
C)  sells for a lower price than if the market price of the stock is $75. 
D)  is in the money and sells for a lower price than if the market price of the stock is $75. 
E)  is out of the money and sells for a lower price than if the market price of the stock is $75.

Question 12

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

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

Question 13

A European put option allows the holder to

Accepted Answer

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. 
E)  potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date. 
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. 
E)  potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

Question 14

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

Accepted Answer

A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.27 
A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.27

Question 15

What happens to an option if the underlying stock has a 3-for-1 split?

Accepted Answer

A)  There is no change in either the exercise price or in the number of options held. 
B)  The exercise price will adjust through normal market movements; the number of options will remain the same. 
C)  The exercise price would become one-third of what it was, and the number of options held would triple. 
D)  The exercise price would triple, and the number of options held would triple. 
E)  There is no standard rule-each corporation has its own policy. 
A)  There is no change in either the exercise price or in the number of options held. 
B)  The exercise price will adjust through normal market movements; the number of options will remain the same. 
C)  The exercise price would become one-third of what it was, and the number of options held would triple. 
D)  The exercise price would triple, and the number of options held would triple. 
E)  There is no standard rule-each corporation has its own policy.

Question 16

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.

Accepted Answer

A)  $600 
B)  $500 
C)  $200 
D)  $300 
E)  $100 
A)  $600 
B)  $500 
C)  $200 
D)  $300 
E)  $100

Question 17

A callable bond should be priced the same as

Accepted Answer

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. 
E)  a straight bond. 
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. 
E)  a straight bond.

Question 18

The current market price of a share of LLY stock is $60. If a put option on this stock has a strike price of $55, the put

Accepted Answer

A)  is in the money. 
B)  is at the money. 
C)  sells for a lower price than if the market price of LLY stock is $50. 
D)  is in the money and sells for a lower price than if the market price of LLY stock is $50. 
E)  is out of the money and sells for a lower price than if the market price of LLY stock is $50. 
A)  is in the money. 
B)  is at the money. 
C)  sells for a lower price than if the market price of LLY stock is $50. 
D)  is in the money and sells for a lower price than if the market price of LLY stock is $50. 
E)  is out of the money and sells for a lower price than if the market price of LLY stock is $50.

Question 19

A dividend paying stock is currently selling for $96. The price of a $95 strike call with a 3 month expiration is selling for $2.15. If the interest rate is 3%, what is the price of the put option assuming a dividend is paid in 3 months and is $0.80?

Accepted Answer

A)  $4.41 
B)  $3.23 
C)  $2.36 
D)  $1.24 
E)  None of the options. 
A)  $4.41 
B)  $3.23 
C)  $2.36 
D)  $1.24 
E)  None of the options.

Question 20

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

Accepted Answer

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

Exam 20: Options Markets: Introduction

To adjust for stock splits

An American put option can be exercised

You purchased one Coca Cola March 50 call and sold one Coca Cola March 55 call. Your strategy is known as

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

Which of the following factors affect the price of a stock option?

Currency-translated options have

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

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

The current market price of a share of IBM 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 a stock is $80. If a put option on this stock has a strike price of $75, the put

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 European put option allows the holder to

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

What happens to an option if the underlying stock has a 3-for-1 split?

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 callable bond should be priced the same as

The current market price of a share of LLY stock is $60. If a put option on this stock has a strike price of $55, the put

A dividend paying stock is currently selling for $96. The price of a $95 strike call with a 3 month expiration is selling for $2.15. If the interest rate is 3%, what is the price of the put option assuming a dividend is paid in 3 months and is $0.80?

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

The Investment Environment

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

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral 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

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