Question 1

The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, the put

Accepted Answer

A)  is out of the money. 
B)  is at 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 at 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 2

A covered call position is

Accepted Answer

A)  the simultaneous purchase of the call and the underlying asset. 
B)  the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C)  the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D)  the purchase of a share of stock with a simultaneous sale of a call on that stock. 
E)  the simultaneous purchase of a call and sale of a put on the same stock. 
A)  the simultaneous purchase of the call and the underlying asset. 
B)  the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C)  the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D)  the purchase of a share of stock with a simultaneous sale of a call on that stock. 
E)  the simultaneous purchase of a call and sale of a put on the same stock.

Question 3

The price that the buyer of a put option pays to acquire the option is called the

Accepted Answer

A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  acquisition price. 
E)  premium. 
A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  acquisition price. 
E)  premium.

Question 4

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

Accepted Answer

A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  strike price or exercise price. 
E)  strike price or execution price. 
A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  strike price or exercise price. 
E)  strike price or execution price.

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. 
E)  in the month of May and for high 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. 
E)  in the month of May and for high dividend-payout policies.

Question 6

You buy one Loews June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

Accepted Answer

A)  $500. 
B)  $300. 
C)  $800. 
D)  $200. 
E)  None of the options are correct. 
A)  $500. 
B)  $300. 
C)  $800. 
D)  $200. 
E)  None of the options are correct.

Question 7

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 
E)  None of the options. 
A)  $4.38 
B)  $5.60 
C)  $6.23 
D)  $12.26 
E)  None of the options.

Question 8

The current market price of a share of IBM stock is $76. If a put option on this stock has a strike price of $80, the put

Accepted Answer

A)  is out of the money. 
B)  is at 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 at 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 9

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?

Accepted Answer

A)  You will have to pay $1,680. 
B)  You will receive $1,720. 
C)  You will receive $1,680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000. 
A)  You will have to pay $1,680. 
B)  You will receive $1,720. 
C)  You will receive $1,680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000.

Question 10

A European call 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

The current market price of a share of CSCO stock is $75. If a put option on this stock has a strike price of $70, the put

Accepted Answer

A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of CSCO stock is $70. 
D)  is out of the money and sells for a higher price than if the market price of CSCO stock is $70. 
E)  is in the money and sells for a higher price than if the market price of CSCO stock is $70. 
A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of CSCO stock is $70. 
D)  is out of the money and sells for a higher price than if the market price of CSCO stock is $70. 
E)  is in the money and sells for a higher price than if the market price of CSCO stock is $70.

Question 12

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

Accepted Answer

A)  the call value plus the present value of the exercise price plus the stock price. 
B)  the call value plus the present value of the exercise price minus the stock price. 
C)  the present value of the stock price minus the exercise price minus the call price. 
D)  the present value of the stock price plus the exercise price minus the call price. 
E)  None of the options are correct. 
A)  the call value plus the present value of the exercise price plus the stock price. 
B)  the call value plus the present value of the exercise price minus the stock price. 
C)  the present value of the stock price minus the exercise price minus the call price. 
D)  the present value of the stock price plus the exercise price minus the call price. 
E)  None of the options are correct.

Question 13

The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call

Accepted Answer

A)  is out of the money. 
B)  is at the money. 
C)  sells for a higher price than if the market price of CSCO stock is $21. 
D)  is out of the money and sells for a higher price than if the market price of CSCO stock is $21. 
E)  is in the money and sells for a higher price than if the market price of CSCO stock is $21. 
A)  is out of the money. 
B)  is at the money. 
C)  sells for a higher price than if the market price of CSCO stock is $21. 
D)  is out of the money and sells for a higher price than if the market price of CSCO stock is $21. 
E)  is in the money and sells for a higher price than if the market price of CSCO stock is $21.

Question 14

All else equal, call option values are higher

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. 
E)  in the month of May and for high 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. 
E)  in the month of May and for high dividend-payout policies.

Question 15

The current market price of a share of Coca Cola stock is $50. If a call option on this stock has a strike price of $45, the call

Accepted Answer

A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of Coca Cola stock is $40. 
D)  is out of the money and sells for a higher price than if the market price of Coca Cola stock is $40. 
E)  is in the money and sells for a higher price than if the market price of Coca Cola stock is $40. 
A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of Coca Cola stock is $40. 
D)  is out of the money and sells for a higher price than if the market price of Coca Cola stock is $40. 
E)  is in the money and sells for a higher price than if the market price of Coca Cola stock is $40.

Question 16

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?

Accepted Answer

A)  $17.50 
B)  $15.26 
C)  $10.36 
D)  $12.26 
E)  None of the options. 
A)  $17.50 
B)  $15.26 
C)  $10.36 
D)  $12.26 
E)  None of the options.

Question 17

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. 
E)  is in 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. 
E)  is in the money and sells for a higher price than if the strike price of the put option was $25.

Question 18

The following price quotations on WFM were taken from the Wall Street Journal. $\begin{array}{rrr}
\text { Stock Price}&\text { Strike }&\text { February }\
&\text { Price }&\
927 / 8 & 85 & 87 / 8 \
927 / 8 & 90 & 41 / 8 \
927 / 8 & 95 & 15 / 8
\end{array}$

The premium on one WFM February 85 call contract is

Accepted Answer

A)  $8.875. 
B)  $887.50. 
C)  $412.50. 
D)  $158.00. 
A)  $8.875. 
B)  $887.50. 
C)  $412.50. 
D)  $158.00.

Question 19

The put-call parity theorem

Accepted Answer

A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 20

The current market price of a share of Disney stock is $60. If a put option on this stock has a strike price of $65, the put

Accepted Answer

A)  is out of the money. 
B)  is at 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 at 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.

Exam 20: Options Markets: Introduction

The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, the put

A covered call position is

The price that the buyer of a put option pays to acquire the option is called the

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

All else equal, call option values are lower

You buy one Loews June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

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?

The current market price of a share of IBM stock is $76. If a put option on this stock has a strike price of $80, the put

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?

A European call option can be exercised

The current market price of a share of CSCO stock is $75. If a put option on this stock has a strike price of $70, the put

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call

All else equal, call option values are higher

The current market price of a share of Coca Cola stock is $50. If a call option on this stock has a strike price of $45, the call

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of 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

The following price quotations on WFM were taken from the Wall Street Journal. Stock Price Strike February Price 927/8 85 87/8 927/8 90 41/8 927/8 95 15/8 The premium on one WFM February 85 call contract is

The put-call parity theorem

The current market price of a share of Disney stock is $60. If a put option on this stock has a strike price of $65, the put

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