Question 1

To hedge a short sale, an investor could:

Accepted Answer

A)  buy a call. 
B)  write a call. 
C)  buy a put. 
D)  write a put. 
A)  buy a call. 
B)  write a call. 
C)  buy a put. 
D)  write a put.

Question 2

Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.

Accepted Answer

The answer of Use the Black-Scholes model to calculate the...

Question 3

Fred wrote a naked call option on Mitrosoft stock. When written the call had a premium of $6, an expiration of one month, an exercise price of $40, and the stock was selling at $36. At expiration, Mitrosoft was selling at $43. What profit/loss did Fred earn? Assume the option was for one share of stock.

Accepted Answer

The answer of Fred wrote a naked call option on...

Question 4

The writer of a call, like the buyer of a put, is bearish about the stock price.

Accepted Answer

A) True 
 B)False

Question 5

An option is a wasting asset because as its expiration date approaches, its:

Accepted Answer

A)  intrinsic value approaches zero. 
B)  time value approaches zero. 
C)  intrinsic value approaches its time value. 
D)  price approaches zero. 
A)  intrinsic value approaches zero. 
B)  time value approaches zero. 
C)  intrinsic value approaches its time value. 
D)  price approaches zero.

Question 6

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if XYZ rises to $60 in 6 months.

Accepted Answer

Buy the stock: 100 x $50 = $5,

Question 7

Which of the following is not a reason for investors to trade options?

Accepted Answer

A)  Options eliminate leverage. 
B)  Options require a smaller investment than stock investments. 
C)  Options allow investors to trade on overall market movements. 
D)  Options can reduce risk. 
A)  Options eliminate leverage. 
B)  Options require a smaller investment than stock investments. 
C)  Options allow investors to trade on overall market movements. 
D)  Options can reduce risk.

Question 8

Which of the following statements is true regarding equity options contracts?

Accepted Answer

A)  The majority of options contracts are standardized. 
B)  Investors typically create options contracts to trade amongst themselves. 
C)  Options contracts are typically customized to suit the needs of each investor. 
D)  Options are available on all publicly-traded U.S. stocks. 
A)  The majority of options contracts are standardized. 
B)  Investors typically create options contracts to trade amongst themselves. 
C)  Options contracts are typically customized to suit the needs of each investor. 
D)  Options are available on all publicly-traded U.S. stocks.

Question 9

Which of the following statements regarding options is true?

Accepted Answer

A)  An American option's premium should not decline below its intrinsic value. 
B)  If a call is in the money, its time value is zero. 
C)  The speculative premium reflects the option's immediate value. 
D)  If a call is out of the money, its time value is zero. 
A)  An American option's premium should not decline below its intrinsic value. 
B)  If a call is in the money, its time value is zero. 
C)  The speculative premium reflects the option's immediate value. 
D)  If a call is out of the money, its time value is zero.

Question 10

At expiration, the writer of a stock index call option that was written at the money will be required to:

Accepted Answer

A)  deliver the underlying stocks in the index if the index value moves up. 
B)  deliver the underlying stocks in the index if the index value moves down. 
C)  deliver a cash value if the index value moves up. 
D)  deliver a cash value if the index value moves down. 
A)  deliver the underlying stocks in the index if the index value moves up. 
B)  deliver the underlying stocks in the index if the index value moves down. 
C)  deliver a cash value if the index value moves up. 
D)  deliver a cash value if the index value moves down.

Question 11

To provide insurance against declining prices on previously purchased stock, an investor could:

Accepted Answer

A)  buy a call. 
B)  write a put. 
C)  buy a stock index option. 
D)  buy a put. 
A)  buy a call. 
B)  write a put. 
C)  buy a stock index option. 
D)  buy a put.

Question 12

One important reason for the existence of derivatives is that they:

Accepted Answer

A)  help reduce market volatility by making speculation more difficult. 
B)  have valuable tax benefits. 
C)  contribute to market completeness. 
D)  are risk-free. 
A)  help reduce market volatility by making speculation more difficult. 
B)  have valuable tax benefits. 
C)  contribute to market completeness. 
D)  are risk-free.

Question 13

With regard to options, which of the following is not true of the hedge ratio?

Accepted Answer

A)  It indicates the change in the option price for a $1 change in stock price. 
B)  It represents the ratio of options written to shares held long in a riskless portfolio. 
C)  It is frequently greater than 1. 
D)  It is commonly referred to as the option's delta. 
A)  It indicates the change in the option price for a $1 change in stock price. 
B)  It represents the ratio of options written to shares held long in a riskless portfolio. 
C)  It is frequently greater than 1. 
D)  It is commonly referred to as the option's delta.

Question 14

A technology stock and a public utility stock are both selling at $40 per share. Which of the following options should sell for the highest price?

Accepted Answer

A)  A put on the technology stock that has an exercise price of $30. 
B)  A put on the utility stock that has an exercise price of $30. 
C)  A call on the technology stock that has an exercise price of $30. 
D)  A call on the utility stock that has an exercise price of $30. 
A)  A put on the technology stock that has an exercise price of $30. 
B)  A put on the utility stock that has an exercise price of $30. 
C)  A call on the technology stock that has an exercise price of $30. 
D)  A call on the utility stock that has an exercise price of $30.

Question 15

The standard option contract is for:

Accepted Answer

A)  10 shares of stock. 
B)  50 shares of stock. 
C)  100 shares of stock. 
D)  1 share of stock. 
A)  10 shares of stock. 
B)  50 shares of stock. 
C)  100 shares of stock. 
D)  1 share of stock.

Question 16

Carl purchased a call option on Apex stock that had a premium of $4, an exercise price of $25, and six-months to expiration. When he purchased the option, Apex was selling at $27 per share. What profit (per share) would Carl earn on his option transaction if Apex sells at $31 per share at expiration?

Accepted Answer

A)  $0 
B)  $2 
C)  $4 
D)  $6 
A)  $0 
B)  $2 
C)  $4 
D)  $6

Question 17

Gordon is considering purchasing either a call or a put option on XYZ stock. Each of the options has an exercise price of $40 and XYZ is trading at $44.50 per share. Which of the following statements about the options is correct?

Accepted Answer

A)  The put option is in the money, whereas the call option is out of the money. 
B)  The call option is in the money, whereas the put option is out of the money. 
C)  Both the put and the call option are in the money. 
D)  Both the put and the call option are out of the money. 
A)  The put option is in the money, whereas the call option is out of the money. 
B)  The call option is in the money, whereas the put option is out of the money. 
C)  Both the put and the call option are in the money. 
D)  Both the put and the call option are out of the money.

Question 18

Which of the following statements is true regarding the writer of a call contract?

Accepted Answer

A)  The call writer expects the stock to move upward. 
B)  The call writer expects the stock to remain the same or move down. 
C)  The call writer expects the stock to split. 
D)  The call writer expects to sell the stock prior to expiration of the option. 
A)  The call writer expects the stock to move upward. 
B)  The call writer expects the stock to remain the same or move down. 
C)  The call writer expects the stock to split. 
D)  The call writer expects to sell the stock prior to expiration of the option.

Question 19

Using portfolio insurance with options relies on the use of put options.

Accepted Answer

A) True 
 B)False

Question 20

The Options Clearing Corporation (OCC):

Accepted Answer

A)  always has a net position of zero. 
B)  acts as a dealer in options, standing ready to buy or sell from its inventory. 
C)  selects the broker with the largest holdings to honor the exercise of an option. 
D)  uses first in, first out to select a broker to honor the exercise of an option. 
A)  always has a net position of zero. 
B)  acts as a dealer in options, standing ready to buy or sell from its inventory. 
C)  selects the broker with the largest holdings to honor the exercise of an option. 
D)  uses first in, first out to select a broker to honor the exercise of an option.

To hedge a short sale, an investor could:

Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.

The writer of a call, like the buyer of a put, is bearish about the stock price.

An option is a wasting asset because as its expiration date approaches, its:

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if XYZ rises to $60 in 6 months.

Which of the following is not a reason for investors to trade options?

Which of the following statements is true regarding equity options contracts?

Which of the following statements regarding options is true?

At expiration, the writer of a stock index call option that was written at the money will be required to:

To provide insurance against declining prices on previously purchased stock, an investor could:

One important reason for the existence of derivatives is that they:

With regard to options, which of the following is not true of the hedge ratio?

A technology stock and a public utility stock are both selling at $40 per share. Which of the following options should sell for the highest price?

The standard option contract is for:

Gordon is considering purchasing either a call or a put option on XYZ stock. Each of the options has an exercise price of $40 and XYZ is trading at $44.50 per share. Which of the following statements about the options is correct?

Which of the following statements is true regarding the writer of a call contract?

Using portfolio insurance with options relies on the use of put options.

The Options Clearing Corporation (OCC):

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

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Exam 19: Options

To hedge a short sale, an investor could:

Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.

The writer of a call, like the buyer of a put, is bearish about the stock price.

An option is a wasting asset because as its expiration date approaches, its:

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if XYZ rises to $60 in 6 months.

Which of the following is not a reason for investors to trade options?

Which of the following statements is true regarding equity options contracts?

Which of the following statements regarding options is true?

At expiration, the writer of a stock index call option that was written at the money will be required to:

To provide insurance against declining prices on previously purchased stock, an investor could:

One important reason for the existence of derivatives is that they:

With regard to options, which of the following is not true of the hedge ratio?

A technology stock and a public utility stock are both selling at $40 per share. Which of the following options should sell for the highest price?

The standard option contract is for:

Gordon is considering purchasing either a call or a put option on XYZ stock. Each of the options has an exercise price of $40 and XYZ is trading at $44.50 per share. Which of the following statements about the options is correct?

Which of the following statements is true regarding the writer of a call contract?

Using portfolio insurance with options relies on the use of put options.

The Options Clearing Corporation (OCC):

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