Question 1

John plans to acquire shares of ABC Corp. by purchasing and exercising a call option. Which of the following statements regarding John's strategy is correct?

Accepted Answer

A)  John will experience no gain or loss from implementing the strategy. 
B)  John faces no risk from the strategy. 
C)  If John implements the strategy, it will not impact ABC's shares outstanding. 
D)  John will pay no commission to implement the strategy. 
A)  John will experience no gain or loss from implementing the strategy. 
B)  John faces no risk from the strategy. 
C)  If John implements the strategy, it will not impact ABC's shares outstanding. 
D)  John will pay no commission to implement the strategy.

Question 2

Texa Inc. is trading at $23 per share and has options available with a $30 strike price. Which of the following options will have the highest premium?

Accepted Answer

A)  A call option on Texa with a 1-month expiration 
B)  A put option on Texa with a 1-month expiration 
C)  A call option on Texa with a 3-month expiration 
D)  A put option on Texa with a 3-month expiration 
A)  A call option on Texa with a 1-month expiration 
B)  A put option on Texa with a 1-month expiration 
C)  A call option on Texa with a 3-month expiration 
D)  A put option on Texa with a 3-month expiration

Question 3

An investor wants to hedge the Apple stock he holds in his portfolio. How can he use a covered call to do this?

Accepted Answer

The investor owns the stock and will pro

Question 4

How could an investor create 100 shares of artificial stock (i.e., a portfolio with the same payoffs as 100 shares of common stock)?

Accepted Answer

Buy 1 long call and write 1 put contract

Question 5

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Accepted Answer

Put and call options offer leverage comp

Question 6

Stock A has a volatile price history, and Stock B has a stable price history. Stock A and Stock B are both trading at $25 per share. Which of the following 1-month options should sell for the highest price?

Accepted Answer

A)  A call option on Stock A with a $30 exercise price. 
B)  A call option on Stock B with a $30 exercise price. 
C)  A put option on Stock A with a $30 exercise price. 
D)  A put option on Stock B with a $30 exercise price. 
A)  A call option on Stock A with a $30 exercise price. 
B)  A call option on Stock B with a $30 exercise price. 
C)  A put option on Stock A with a $30 exercise price. 
D)  A put option on Stock B with a $30 exercise price.

Question 7

According to the Black Scholes option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 8

An investor wants to hedge the Microsoft stock he holds in his portfolio. How can he use a protective put to do this?

Accepted Answer

The investor owns the stock and will pro

Question 9

Assume CSC stock is selling at $40 in June and Hal places a collar on 1,000 shares of CSC stock by buying a protective put and simultaneously writing a covered call. Hal intends to sell the stock in December regardless of its price.
 $$\begin{array} { | l | l | l | l | } 
\hline \text { Option } & \text { Strike Price } & \text { Expiration } & \text { Premium } \
\hline \text { Put } & \$ 35 & \text { December } & \$ 1.05 \
\hline \text { Call } & \$ 45 & \text { December } & \$ 1.20 \
\hline
\end{array}$$ (a) What net amount did Hal pay or receive when he entered the collar?
(b) If CSC is selling at $47.50 at expiration, find Hal's cash flow at expiration.
(c) If CSC is selling at $30 at expiration, find Hal's cash flow at expiration.

Accepted Answer

To establish a floor, Hal buys the $35 p

Question 10

If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

Accepted Answer

A) True 
 B)False

Question 11

The writer of a naked call faces:

Accepted Answer

A)  an unlimited potential loss. 
B)  a specified potential loss. 
C)  no chance of loss because this is a conservative strategy. 
D)  an unlimited potential gain. 
A)  an unlimited potential loss. 
B)  a specified potential loss. 
C)  no chance of loss because this is a conservative strategy. 
D)  an unlimited potential gain.

Question 12

Which of the following is true regarding option pricing?

Accepted Answer

A)  The longer the maturity of the option, the higher the premium 
B)  The more volatile the underlying stock, the lower the premium 
C)  Option prices are less volatile than equity prices 
D)  European options are more valuable than American options 
A)  The longer the maturity of the option, the higher the premium 
B)  The more volatile the underlying stock, the lower the premium 
C)  Option prices are less volatile than equity prices 
D)  European options are more valuable than American options

Question 13

Put and call options on gold are considered:

Accepted Answer

A)  commodity derivatives. 
B)  financial derivatives. 
C)  forward contracts. 
D)  futures contracts. 
A)  commodity derivatives. 
B)  financial derivatives. 
C)  forward contracts. 
D)  futures contracts.

Question 14

The way to protect a stock portfolio from a bear market is to:

Accepted Answer

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

John plans to acquire shares of ABC Corp. by purchasing and exercising a call option. Which of the following statements regarding John's strategy is correct?

Texa Inc. is trading at $23 per share and has options available with a $30 strike price. Which of the following options will have the highest premium?

An investor wants to hedge the Apple stock he holds in his portfolio. How can he use a covered call to do this?

How could an investor create 100 shares of artificial stock (i.e., a portfolio with the same payoffs as 100 shares of common stock)?

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Stock A has a volatile price history, and Stock B has a stable price history. Stock A and Stock B are both trading at $25 per share. Which of the following 1-month options should sell for the highest price?

According to the Black Scholes option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

An investor wants to hedge the Microsoft stock he holds in his portfolio. How can he use a protective put to do this?

If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

The writer of a naked call faces:

Which of the following is true regarding option pricing?

Put and call options on gold are considered:

The way to protect a stock portfolio from a bear market is to:

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

John plans to acquire shares of ABC Corp. by purchasing and exercising a call option. Which of the following statements regarding John's strategy is correct?

Texa Inc. is trading at $23 per share and has options available with a $30 strike price. Which of the following options will have the highest premium?

An investor wants to hedge the Apple stock he holds in his portfolio. How can he use a covered call to do this?

How could an investor create 100 shares of artificial stock (i.e., a portfolio with the same payoffs as 100 shares of common stock)?

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Stock A has a volatile price history, and Stock B has a stable price history. Stock A and Stock B are both trading at $25 per share. Which of the following 1-month options should sell for the highest price?

According to the Black Scholes option pricing model, option value is a function of stock price, exercise price, time to maturity, interest rate, and volatility of the underlying asset.

An investor wants to hedge the Microsoft stock he holds in his portfolio. How can he use a protective put to do this?

If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

The writer of a naked call faces:

Which of the following is true regarding option pricing?

Put and call options on gold are considered:

The way to protect a stock portfolio from a bear market is to:

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