Question 1

LEAPS are typically:

Accepted Answer

A)  more expensive than short-term options. 
B)  cheaper than short-term options. 
C)  only available for major indexes, not individual stocks. 
D)  long-term options, with maturities between 5 and 10 years. 
A)  more expensive than short-term options. 
B)  cheaper than short-term options. 
C)  only available for major indexes, not individual stocks. 
D)  long-term options, with maturities between 5 and 10 years.

Question 2

What type of equity derivatives are created by corporations?

Accepted Answer

The answer of What type of equity derivatives are created...

Question 3

Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?

Accepted Answer

A)  A speculator 
B)  A call writer 
C)  A put writer 
D)  An arbitrageur 
A)  A speculator 
B)  A call writer 
C)  A put writer 
D)  An arbitrageur

Question 4

Options sold on exchanges are protected against:

Accepted Answer

A)  stock dividends and splits. 
B)  cash dividends. 
C)  interest rate movements. 
D)  inflation. 
A)  stock dividends and splits. 
B)  cash dividends. 
C)  interest rate movements. 
D)  inflation.

Question 5

Which of the following inputs in the Black-Scholes option pricing model is not observed?

Accepted Answer

A)  The interest rate 
B)  The time to expiration 
C)  The stock price 
D)  The variability of the stock 
A)  The interest rate 
B)  The time to expiration 
C)  The stock price 
D)  The variability of the stock

Question 6

Sam is considering purchasing a call option on ABC stock. The call has a premium of $3, an exercise price of $50, and ABC is trading at $51 per share. Which of the following statements about the call option is correct?

Accepted Answer

A)  The call has an intrinsic value of $1 and a time value of $2. 
B)  The call has an intrinsic value of $0 and a time value of $3. 
C)  The call has an intrinsic value of $3 and a time value of $2. 
D)  The call has an intrinsic value of $0 and a time value of $1. 
A)  The call has an intrinsic value of $1 and a time value of $2. 
B)  The call has an intrinsic value of $0 and a time value of $3. 
C)  The call has an intrinsic value of $3 and a time value of $2. 
D)  The call has an intrinsic value of $0 and a time value of $1.

Question 7

List five options exchanges.

Accepted Answer

Chicago Board Options Exchange

Question 8

How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?

Accepted Answer

The owner of a portfolio may e

Question 9

Which of the following statements about call options is false?

Accepted Answer

A)  A call is in the money if the stock price exceeds the exercise price. 
B)  A call has no time value if its intrinsic value is zero. 
C)  If a call is out of the money, its intrinsic value is zero. 
D)  If a call is in the money, its intrinsic value is zero. 
A)  A call is in the money if the stock price exceeds the exercise price. 
B)  A call has no time value if its intrinsic value is zero. 
C)  If a call is out of the money, its intrinsic value is zero. 
D)  If a call is in the money, its intrinsic value is zero.

Question 10

Writing a naked call is potentially riskier than writing a naked put.

Accepted Answer

A) True 
 B)False

Question 11

What is put-call parity? How is it related to arbitrage?

Accepted Answer

This principle expresses the relationshi

Question 12

An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

Accepted Answer

A) True 
 B)False

Question 13

A writer of a call can terminate the contract before expiration by:

Accepted Answer

A)  writing a second call. 
B)  buying a put. 
C)  buying a comparable call. 
D)  writing a put. 
A)  writing a second call. 
B)  buying a put. 
C)  buying a comparable call. 
D)  writing a put.

Question 14

What is meant by portfolio insurance?

Accepted Answer

Portfolio insurance involves strategies

Question 15

The exercise price on an option is also known as the:

Accepted Answer

A)  premium. 
B)  strike price. 
C)  theoretical value. 
D)  spot price. 
A)  premium. 
B)  strike price. 
C)  theoretical value. 
D)  spot price.

Question 16

If the price of a stock exceeds the exercise price of a call, the call is said to be:

Accepted Answer

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

Question 17

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Accepted Answer

A) True 
 B)False

Question 18

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

Accepted Answer

All contracts are effectively

Question 19

In the Black-Scholes option pricing model:

Accepted Answer

A)  all of the inputs except two are observable. 
B)  all of the inputs except one are observable. 
C)  none of the inputs in the model are observable. 
D)  all of the inputs in the model are observable. 
A)  all of the inputs except two are observable. 
B)  all of the inputs except one are observable. 
C)  none of the inputs in the model are observable. 
D)  all of the inputs in the model are observable.

Question 20

For a dividend paying stock, an investor may be wise to exercise an American call option before its expiration date.

Accepted Answer

A) True 
 B)False

Exam 19: Options

LEAPS are typically:

What type of equity derivatives are created by corporations?

Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?

Options sold on exchanges are protected against:

Which of the following inputs in the Black-Scholes option pricing model is not observed?

Sam is considering purchasing a call option on ABC stock. The call has a premium of $3, an exercise price of $50, and ABC is trading at $51 per share. Which of the following statements about the call option is correct?

List five options exchanges.

How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?

Which of the following statements about call options is false?

Writing a naked call is potentially riskier than writing a naked put.

What is put-call parity? How is it related to arbitrage?

An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

A writer of a call can terminate the contract before expiration by:

What is meant by portfolio insurance?

The exercise price on an option is also known as the:

If the price of a stock exceeds the exercise price of a call, the call is said to be:

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

In the Black-Scholes option pricing model:

For a dividend paying stock, an investor may be wise to exercise an American call option before its expiration date.

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters