Question 1

Put options are typically used to hedge when portfolio managers are mainly concerned about

Accepted Answer

A) a permanent decline in a stock's value. 
B) a permanent increase in a stock's value. 
C) a temporary decline in a stock's value. 
D) a temporary increase in a stock's value. 
A) a permanent decline in a stock's value. 
B) a permanent increase in a stock's value. 
C) a temporary decline in a stock's value. 
D) a temporary increase in a stock's value.

Question 2

Market makers can execute stock option transactions for customers but do not trade stock options for their own account.

Accepted Answer

A) True 
 B)False

Question 3

Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.

Accepted Answer

A) - 406.25 
B) 4,718.75 
C) - 4,718.75 
D) - 812.50 
E) None of these are correct. 
A) - 406.25 
B) 4,718.75 
C) - 4,718.75 
D) - 812.50 
E) None of these are correct.

Question 4

The ____, the higher the call option premium, other things being equal.

Accepted Answer

A) lower the existing price of the underlying security relative to the exercise price 
B) lower the volatility of the underlying security's market price 
C) longer the time to maturity of the option 
D) lower the existing price of the underlying security relative to the exercise price AND  lower the volatility of the underlying security's market price 
A) lower the existing price of the underlying security relative to the exercise price 
B) lower the volatility of the underlying security's market price 
C) longer the time to maturity of the option 
D) lower the existing price of the underlying security relative to the exercise price AND  lower the volatility of the underlying security's market price

Question 5

American-style stock options can be exercised only just before expiration. ​

Accepted Answer

A) True 
 B)False

Question 6

Speculators sell call options on currencies that they expect to strengthen against the dollar. ​

Accepted Answer

A) True 
 B)False

Question 7

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. ​

Accepted Answer

A) higher; lower 
B) lower; higher 
C) higher; higher 
D) lower; lower 
A) higher; lower 
B) lower; higher 
C) higher; higher 
D) lower; lower

Question 8

The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. ​

Accepted Answer

A) True 
 B)False

Question 9

When the market price of the underlying security exceeds the exercise price, a

Accepted Answer

A) call option is in the money. 
B) put option is in the money. 
C) call option is at the money. 
D) call option is out of the money. 
A) call option is in the money. 
B) put option is in the money. 
C) call option is at the money. 
D) call option is out of the money.

Question 10

Corporations involved in international business transactions may purchase ________   to hedge __________ denominated in a foreign currency.

Accepted Answer

A) currency put options; future receivables 
B) currency call options; future payables 
C) currency call options; future receivables 
D) currency put options; future receivables AND  currency call options; future payables 
A) currency put options; future receivables 
B) currency call options; future payables 
C) currency call options; future receivables 
D) currency put options; future receivables AND  currency call options; future payables

Question 11

The results with covered call writing are better than the results without covered call writing both when the stock performs poorly and when it performs well.

Accepted Answer

A) True 
 B)False

Question 12

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. ​

Accepted Answer

A) True 
 B)False

Question 13

When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."

Accepted Answer

A) True 
 B)False

Question 14

Sellers (writers)of call options can close out their position at any point in time by

Accepted Answer

A) selling a put option on the same stock. 
B) buying identical call options. 
C) selling additional call options on the same stock. 
D) selling a put option on the same stock AND buying identical call options. 
A) selling a put option on the same stock. 
B) buying identical call options. 
C) selling additional call options on the same stock. 
D) selling a put option on the same stock AND buying identical call options.

Question 15

The longer a call option's time to maturity, the lower the call option premium, other things being equal.

Accepted Answer

A) True 
 B)False

Question 16

Speculators who anticipate a decline in interest rates may consider ________ option on Treasury bond futures.

Accepted Answer

A) purchasing a put option 
B) selling a call option 
C) purchasing a call option 
D) None of these are correct. 
A) purchasing a put option 
B) selling a call option 
C) purchasing a call option 
D) None of these are correct.

Question 17

The premium on an existing put option should ____ when there is an increase in the volatility of the underlying stock.

Accepted Answer

A) be negative 
B) decline 
C) increase 
D) be unaffected 
E) be negative AND decline 
A) be negative 
B) decline 
C) increase 
D) be unaffected 
E) be negative AND decline

Question 18

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

Accepted Answer

A) higher; lower 
B) lower; higher 
C) higher; higher 
D) lower; lower 
A) higher; lower 
B) lower; higher 
C) higher; higher 
D) lower; lower

Question 19

The premium on an existing put option should ____ when the price of the underlying stock increases.

Accepted Answer

A) be negative 
B) decline 
C) increase 
D) be unaffected 
E) be negative AND decline 
A) be negative 
B) decline 
C) increase 
D) be unaffected 
E) be negative AND decline

Question 20

Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium.

Accepted Answer

A) higher; higher; higher 
B) higher; higher; lower 
C) higher; lower; higher 
D) lower; lower; higher 
E) None of these are correct. 
A) higher; higher; higher 
B) higher; higher; lower 
C) higher; lower; higher 
D) lower; lower; higher 
E) None of these are correct.

Exam 14: Options Markets

Put options are typically used to hedge when portfolio managers are mainly concerned about

Market makers can execute stock option transactions for customers but do not trade stock options for their own account.

The ____, the higher the call option premium, other things being equal.

American-style stock options can be exercised only just before expiration. ​

Speculators sell call options on currencies that they expect to strengthen against the dollar. ​

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. ​

The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. ​

When the market price of the underlying security exceeds the exercise price, a

Corporations involved in international business transactions may purchase ________ to hedge __________ denominated in a foreign currency.

The results with covered call writing are better than the results without covered call writing both when the stock performs poorly and when it performs well.

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. ​

When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."

Sellers (writers)of call options can close out their position at any point in time by

The longer a call option's time to maturity, the lower the call option premium, other things being equal.

Speculators who anticipate a decline in interest rates may consider ________ option on Treasury bond futures.

The premium on an existing put option should ____ when there is an increase in the volatility of the underlying stock.

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

The premium on an existing put option should ____ when the price of the underlying stock increases.

Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

American-style stock options can be exercised only just before expiration.

Speculators sell call options on currencies that they expect to strengthen against the dollar.

The greater the volatility of the underlying stock, the the call option premium and the the put option premium.

The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal.

Corporations involved in international business transactions may purchase to hedge __ denominated in a foreign currency.

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility.

The longer the time to maturity, the the call option premium and the the put option premium.

Assuming the same expiration date, an option with a exercise price has a call option premium and a put option premium.