Question 1

Other things equal, after an option is created, its:

Accepted Answer

A)  time value approaches zero as time passes. 
B)  time value increases into its expiration date. 
C)  value moves inversely with the volatility of the underlying stock. 
D)  value will be zero whenever it is out of the money. 
A)  time value approaches zero as time passes. 
B)  time value increases into its expiration date. 
C)  value moves inversely with the volatility of the underlying stock. 
D)  value will be zero whenever it is out of the money. A

Question 2

Which of the following is not a determinant of the value of a call option in the Black-Scholes model?

Accepted Answer

A)  The interest rate 
B)  The exercise price of the stock 
C)  The price of the underlying stock 
D)  The beta of the underlying stock 
A)  The interest rate 
B)  The exercise price of the stock 
C)  The price of the underlying stock 
D)  The beta of the underlying stock D

Question 3

Gwen wrote a put option with a $15 strike price on RDX stock when the stock price was $16 per share. The option premium was $3. What is the maximum loss (per share) that Gwen could experience on her option position?

Accepted Answer

A)  $3 
B)  $12 
C)  $14 
D)  $15 
A)  $3 
B)  $12 
C)  $14 
D)  $15 B

Question 4

A call option written against stock owned by the writer is said to be:

Accepted Answer

A)  naked. 
B)  in the money. 
C)  out of the money. 
D)  covered. 
A)  naked. 
B)  in the money. 
C)  out of the money. 
D)  covered.

Question 5

A stock has a price of $68 per share. A two-month put (strike price = $70) on the stock is available at a $6 premium. The intrinsic value on the put is:

Accepted Answer

A)  $0 and its time value is $6. 
B)  $0 and its time value is $4. 
C)  $2 and its time value is $4. 
D)  $4 and its time value is $2. 
A)  $0 and its time value is $6. 
B)  $0 and its time value is $4. 
C)  $2 and its time value is $4. 
D)  $4 and its time value is $2.

Question 6

Helen purchased a put option that had an exercise price of $50, a premium of $2, five months to expiration, and a stock price of $52. At expiration the stock was selling at $54. What profit/loss did Helen earn? Assume the option was for one share of stock.

Accepted Answer

A)  -$4 
B)  -$2 
C)  0 
D)  +$2 
A)  -$4 
B)  -$2 
C)  0 
D)  +$2

Question 7

Which of the following statements about portfolio insurance is false?

Accepted Answer

A)  There are several methods of insuring a portfolio. 
B)  It seeks to provide a minimum return while offering the opportunity to participate in rising prices. 
C)  Futures are typically not used to hedge stock portfolios. 
D)  Puts and calls typically are not used to insure portfolios. 
A)  There are several methods of insuring a portfolio. 
B)  It seeks to provide a minimum return while offering the opportunity to participate in rising prices. 
C)  Futures are typically not used to hedge stock portfolios. 
D)  Puts and calls typically are not used to insure portfolios.

Question 8

An investor applying a protective put strategy is hoping that the price of the underlying stock falls.

Accepted Answer

A) True 
 B)False

Question 9

If the price of the underlying common stock is less than the exercise price of a call, it is in the money.

Accepted Answer

A) True 
 B)False

Question 10

Concerning stock index options, which of the following statements is false?

Accepted Answer

A)  Index options appeal to speculators due to the leverage they offer. 
B)  Investors can write index options. 
C)  If exercised, the holder of a stock index call receives the underlying stock. 
D)  Index options are settled in cash. 
A)  Index options appeal to speculators due to the leverage they offer. 
B)  Investors can write index options. 
C)  If exercised, the holder of a stock index call receives the underlying stock. 
D)  Index options are settled in cash.

Question 11

For Grace to maximize her potential return from a bullish view on a stock, she should:

Accepted Answer

A)  buy calls on the stock. 
B)  write calls on the stock. 
C)  buy puts on the stock. 
D)  write puts on the stock. 
A)  buy calls on the stock. 
B)  write calls on the stock. 
C)  buy puts on the stock. 
D)  write puts on the stock.

Question 12

Options traded on organized exchanges are protected against cash dividends.

Accepted Answer

A) True 
 B)False

Question 13

There is a positive relationship between the price of a put option and the volatility of the underlying common stock.

Accepted Answer

A) True 
 B)False

Question 14

The Options Clearing Corporation does not ensure fulfillment of option obligations.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true regarding American and European options?

Accepted Answer

A)  American options can be exercised only at expiration. 
B)  American options can be exercised only in the last week prior to expiration. 
C)  European options can be exercised only at expiration. 
D)  European options can be exercised any time prior to expiration. 
A)  American options can be exercised only at expiration. 
B)  American options can be exercised only in the last week prior to expiration. 
C)  European options can be exercised only at expiration. 
D)  European options can be exercised any time prior to expiration.

Question 16

Options can be purchased on margin.

Accepted Answer

A) True 
 B)False

Question 17

What is a hedge ratio?

Accepted Answer

The hedge ratio for a call is N(d₁) from

Question 18

For Gordon to maximize his potential return from a bearish view on a stock, he should:

Accepted Answer

A)  buy calls. 
B)  write calls. 
C)  buy puts. 
D)  write puts. 
A)  buy calls. 
B)  write calls. 
C)  buy puts. 
D)  write puts.

Question 19

Walt wrote a put option that had a $15 strike price on ABC stock when the stock price was $16 per share. The option premium was $3. What is the maximum profit (per share) that Walt can make on his option position?

Accepted Answer

A)  $2 
B)  $3 
C)  $15 
D)  $16 
A)  $2 
B)  $3 
C)  $15 
D)  $16

Question 20

What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?

Accepted Answer

Price of underlying stock. The higher th

Exam 19: Options

Other things equal, after an option is created, its:

Which of the following is not a determinant of the value of a call option in the Black-Scholes model?

Gwen wrote a put option with a $15 strike price on RDX stock when the stock price was $16 per share. The option premium was $3. What is the maximum loss (per share) that Gwen could experience on her option position?

A call option written against stock owned by the writer is said to be:

A stock has a price of $68 per share. A two-month put (strike price = $70) on the stock is available at a $6 premium. The intrinsic value on the put is:

Helen purchased a put option that had an exercise price of $50, a premium of $2, five months to expiration, and a stock price of $52. At expiration the stock was selling at $54. What profit/loss did Helen earn? Assume the option was for one share of stock.

Which of the following statements about portfolio insurance is false?

An investor applying a protective put strategy is hoping that the price of the underlying stock falls.

If the price of the underlying common stock is less than the exercise price of a call, it is in the money.

Concerning stock index options, which of the following statements is false?

For Grace to maximize her potential return from a bullish view on a stock, she should:

Options traded on organized exchanges are protected against cash dividends.

There is a positive relationship between the price of a put option and the volatility of the underlying common stock.

The Options Clearing Corporation does not ensure fulfillment of option obligations.

Which of the following statements is true regarding American and European options?

Options can be purchased on margin.

What is a hedge ratio?

For Gordon to maximize his potential return from a bearish view on a stock, he should:

Walt wrote a put option that had a $15 strike price on ABC stock when the stock price was $16 per share. The option premium was $3. What is the maximum profit (per share) that Walt can make on his option position?

What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?

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