Question 1

____ can execute transactions desired by investors and trade stock options for their own account.

Accepted Answer

A) Maintenance brokers 
B) Discount brokers 
C) Market makers 
D) None of these are correct. 
A) Maintenance brokers 
B) Discount brokers 
C) Market makers 
D) None of these are correct.

Question 2

Which of the following can normally be found in quotations for stock options?

Accepted Answer

A) exercise price, expiration date, and implied volatility 
B) exercise price, expiration date, and most recently quoted premium 
C) expiration date, implied volatility, and trading volume 
D) expiration date, most recently quoted premium, and implied volatility 
A) exercise price, expiration date, and implied volatility 
B) exercise price, expiration date, and most recently quoted premium 
C) expiration date, implied volatility, and trading volume 
D) expiration date, most recently quoted premium, and implied volatility

Question 3

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

Accepted Answer

A) $26 
B) $34 
C) $28 
D) $29 
E) $32 
A) $26 
B) $34 
C) $28 
D) $29 
E) $32

Question 4

Assume an insurance company purchases a call option on a stock index futures contract for a premium of 14, with an exercise price of 1800. The value of a stock index futures contract is 250 times the index. If the stock index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?

Accepted Answer

A) $15,000 
B) $7,500 
C) $3,300 
D) $4,000 
E) $1,500 
A) $15,000 
B) $7,500 
C) $3,300 
D) $4,000 
E) $1,500

Question 5

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. ​

Accepted Answer

A) True 
 B)False

Question 6

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

Accepted Answer

A) put; strengthen 
B) put; weaken 
C) call; strengthen 
D) call; weaken 
E) put; strengthen AND call; weaken 
A) put; strengthen 
B) put; weaken 
C) call; strengthen 
D) call; weaken 
E) put; strengthen AND call; weaken

Question 7

European-style stock options

Accepted Answer

A) are long-term options (at least one year until expiration at the time they are created). 
B) can be exercised after the expiration date. 
C) can be exercised any time until the expiration date. 
D) None of these are correct. 
A) are long-term options (at least one year until expiration at the time they are created). 
B) can be exercised after the expiration date. 
C) can be exercised any time until the expiration date. 
D) None of these are correct.

Question 8

The ____ is not a factor affecting the call option premium.

Accepted Answer

A) market price of the underlying instrument (relative to the option's exercise price) 
B) volatility of the underlying instrument 
C) current price of futures contracts on the underlying instrument 
D) time to maturity of the call option 
A) market price of the underlying instrument (relative to the option's exercise price) 
B) volatility of the underlying instrument 
C) current price of futures contracts on the underlying instrument 
D) time to maturity of the call option

Question 9

Which of the following is  NOT  an assumption underlying the Black-Scholes option-pricing model?

Accepted Answer

A) The risk-free rate is known and constant over the life of the option. 
B) The probability distribution of stock prices is lognormal. 
C) Investors are risk averse and will always choose the option that involves the least risk. 
D) The variability of a stock's return is constant. 
E) There are no transaction costs involved in trading options. 
A) The risk-free rate is known and constant over the life of the option. 
B) The probability distribution of stock prices is lognormal. 
C) Investors are risk averse and will always choose the option that involves the least risk. 
D) The variability of a stock's return is constant. 
E) There are no transaction costs involved in trading options.

Question 10

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.

Accepted Answer

A) reduce 
B) completely eliminate 
C) have no effect on 
D) increase 
A) reduce 
B) completely eliminate 
C) have no effect on 
D) increase

Question 11

The premium on an existing call option should ____ when there is a reduction 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 12

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

Accepted Answer

A) - $4 
B) - $3 
C) - $2 
D) $2 
E) $3 
A) - $4 
B) - $3 
C) - $2 
D) $2 
E) $3

Question 13

Several call options are available for a given stock, and the risk-return potential will vary among them ​

Accepted Answer

A) True 
 B)False

Question 14

Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures (which will have a face value at maturity of $100,000)is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____.

Accepted Answer

A) 2,687.50 
B) - 2,687.50 
C) 2,375.00 
D) 7,437.50 
E) None of these are correct. 
A) 2,687.50 
B) - 2,687.50 
C) 2,375.00 
D) 7,437.50 
E) None of these are correct.

Question 15

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) limits; increases 
D) limits; decreases 
A) increases; increases 
B) increases; decreases 
C) limits; increases 
D) limits; decreases

Question 16

A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.

Accepted Answer

A) True 
 B)False

Question 17

A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain?

Accepted Answer

A) $1,968.75 
B) $3,750.00 
C) $3,000.00 
D) - $2,000.00 
E) $1,000.00 
A) $1,968.75 
B) $3,750.00 
C) $3,000.00 
D) - $2,000.00 
E) $1,000.00

Question 18

The premium on an existing put option should ____ when there is a reduction 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 19

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?

Accepted Answer

A) $4 gain 
B) $6 loss 
C) $2 loss 
D) $1 gain 
E) $0 
A) $4 gain 
B) $6 loss 
C) $2 loss 
D) $1 gain 
E) $0

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 14: Options Markets

____ can execute transactions desired by investors and trade stock options for their own account.

Which of the following can normally be found in quotations for stock options?

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. ​

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

European-style stock options

The ____ is not a factor affecting the call option premium.

Which of the following is NOT an assumption underlying the Black-Scholes option-pricing model?

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.

The premium on an existing call option should ____ when there is a reduction in the volatility of the underlying stock.

Several call options are available for a given stock, and the risk-return potential will vary among them ​

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.

A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.

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

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

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

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes.

Speculators may be willing to write options on foreign currencies they expect to against the dollar.

Several call options are available for a given stock, and the risk-return potential will vary among them

Covered call writing the upside potential return and the risk of an investment in stock.