Question 1

Exchange-traded options on futures that are based on debt instruments have been far less popular than exchange-traded options on physicals.

Accepted Answer

A) True 
 B)False

Question 2

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $3 per share. Suppose that on the expiration date, the current price is $49. What is your net profit or loss per share?

Accepted Answer

A)  -$4.00 
B)  -$3.00 
C)  -$2.00 
D)  $0.00 
A)  -$4.00 
B)  -$3.00 
C)  -$2.00 
D)  $0.00

Question 3

There are interest rate options in which the underlying is a debt instrument (called an option on a physical) and a futures contract (called a futures option).

Accepted Answer

A) True 
 B)False

Question 4

In regards to long-term equity anticipation securities (LEAPS), which of the below statements is TRUE?

Accepted Answer

A)  LEAPS are option contracts designed to offer option contracts with shorter maturities. 
B)  LEAPS contracts are available on individual stocks and some indexes. 
C)  Stock option LEAPS are comparable to standard stock options because the maturities can range up to 39 months from the origination date. 
D)  Index options LEAPS are the same in size compared with standard index options having a multiplier of 100. 
A)  LEAPS are option contracts designed to offer option contracts with shorter maturities. 
B)  LEAPS contracts are available on individual stocks and some indexes. 
C)  Stock option LEAPS are comparable to standard stock options because the maturities can range up to 39 months from the origination date. 
D)  Index options LEAPS are the same in size compared with standard index options having a multiplier of 100.

Question 5

In the case of a ________, both buyer and seller are obligated to perform.

Accepted Answer

A)  call option contract 
B)  put option contract 
C)  futures contract 
D)  All of these 
A)  call option contract 
B)  put option contract 
C)  futures contract 
D)  All of these

Question 6

The maximum amount that an option buyer can lose is the ________ price. The maximum profit that the option writer (seller) can realize is the ________ price.

Accepted Answer

A)  option; exercise 
B)  call; option 
C)  option; option 
D)  call; put 
A)  option; exercise 
B)  call; option 
C)  option; option 
D)  call; put

Question 7

Describe and summarize the meaning of the four option positions.

Accepted Answer

The four basic option positions are:buyi

Question 8

In an option contract, the writer of the option grants the buyer of the option the ________, but not the ________, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date).

Accepted Answer

A)  obligation; right 
B)  obligation; privilege 
C)  right; obligation 
D)  right; privilege 
A)  obligation; right 
B)  obligation; privilege 
C)  right; obligation 
D)  right; privilege

Question 9

Suppose you purchase a put option on Asset XYZ that has an exercise price of $40. The option price is $2 per share. Suppose that on the expiration date, the current price is $39. What is your net profit or loss?

Accepted Answer

A)  -$3.00 
B)  -$1.00 
C)  $0.00 
D)  $1.00 
A)  -$3.00 
B)  -$1.00 
C)  $0.00 
D)  $1.00

Question 10

________ can be used to ________ against a decline in the price of the ________ instrument.

Accepted Answer

A)  A call option; hedge; underlying 
B)  A put option; hedge; underlying 
C)  A call option; speculate; primary 
D)  A put option; speculate; secondary 
A)  A call option; hedge; underlying 
B)  A put option; hedge; underlying 
C)  A call option; speculate; primary 
D)  A put option; speculate; secondary

Question 11

In determining the payoff from an option, the time value of money as a result of having to finance the option price must be considered.

Accepted Answer

A) True 
 B)False

Question 12

Which of the below statements is FALSE?

Accepted Answer

A)  Complex OTC options are called exotic options. 
B)  An alternative option, also called an either-or option, has a payoff which is the best independent payoff of two distinct assets. 
C)  An outperformance option is an option whose payoff is based on the relative payoff of two assets at the expiration date. 
D)  None of these 
A)  Complex OTC options are called exotic options. 
B)  An alternative option, also called an either-or option, has a payoff which is the best independent payoff of two distinct assets. 
C)  An outperformance option is an option whose payoff is based on the relative payoff of two assets at the expiration date. 
D)  None of these

Question 13

In regards to interest rate options, which of the below statements is TRUE?

Accepted Answer

A)  Interest rate options cannot be written on cash instruments or futures. 
B)  At one time, there were several exchange-traded option contracts whose underlying instrument was a debt instrument. These contracts are referred to as futures on physicals. 
C)  In recent years, market participants have made decreasingly greater use of over-the-counter options on Treasury, agency debentures, and mortgage-backed securities. 
D)  Besides options on fixed-income securities, investors can obtain OTC options on a yield spread. 
A)  Interest rate options cannot be written on cash instruments or futures. 
B)  At one time, there were several exchange-traded option contracts whose underlying instrument was a debt instrument. These contracts are referred to as futures on physicals. 
C)  In recent years, market participants have made decreasingly greater use of over-the-counter options on Treasury, agency debentures, and mortgage-backed securities. 
D)  Besides options on fixed-income securities, investors can obtain OTC options on a yield spread.

Question 14

Which of the below statements is FALSE?

Accepted Answer

A)  The S&P 500 Index Option contract is European and the underlying is the S&P 500. 
B)  There are stock index options for components of the major broad-based stock market indexes, selected industries, and selected sectors. 
C)  There are stock index options based on the exercise style but not based on the length of the expiration period. 
D)  Stock index options are cash settlement contracts, which means that, if the option is exercised, the exchange-assigned option writer pays cash to the option buyer. 
A)  The S&P 500 Index Option contract is European and the underlying is the S&P 500. 
B)  There are stock index options for components of the major broad-based stock market indexes, selected industries, and selected sectors. 
C)  There are stock index options based on the exercise style but not based on the length of the expiration period. 
D)  Stock index options are cash settlement contracts, which means that, if the option is exercised, the exchange-assigned option writer pays cash to the option buyer.

Question 15

The buyer of a put option benefits if the price of the underlying is unchanged or rises.

Accepted Answer

A) True 
 B)False

Question 16

Which of the below statements is FALSE?

Accepted Answer

A)  An option is a contract in which the writer of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at the exercise (or strike) price within a specified period of time (until the expiration date). 
B)  The price paid by the option buyer is called the option price or option premium. 
C)  A call option grants the option buyer the right to buy something from the option writer, and a put option grants the option buyer the right to sell something to the option writer. 
D)  None of these 
A)  An option is a contract in which the writer of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at the exercise (or strike) price within a specified period of time (until the expiration date). 
B)  The price paid by the option buyer is called the option price or option premium. 
C)  A call option grants the option buyer the right to buy something from the option writer, and a put option grants the option buyer the right to sell something to the option writer. 
D)  None of these

Question 17

One distinction between futures and options contracts is that ________ to an option contract ________ to transact at a later date.

Accepted Answer

A)  one party; is not obligated 
B)  both parties; are not obligated 
C)  one party; is obligated 
D)  both parties; are obligated 
A)  one party; is not obligated 
B)  both parties; are not obligated 
C)  one party; is obligated 
D)  both parties; are obligated

Question 18

Suppose that a futures contract with Asset XYZ as the underlying instrument has a futures price equal to $100 and a settlement date one month from now. Which of the below statement is FALSE for an investor who SELLS this futures contract?

Accepted Answer

A)  By selling this futures contract, the investor would be agreeing to sell Asset XYZ for $100 one month from now. 
B)  If Asset XYZ's price falls below $100, the investor (who sells this futures contract) is protected because she will receive $100 upon delivery of the asset to satisfy the futures contract. 
C)  If Asset XYZ's price rises above $100, the investor (who sells this futures contract) will not realize the price appreciation because she must deliver the asset for an agreed-upon amount of $100. 
D)  By selling the futures contract, the investor has locked in a price of $100, and fails to realize a gain if the price declines while avoiding a loss if the price rises. 
A)  By selling this futures contract, the investor would be agreeing to sell Asset XYZ for $100 one month from now. 
B)  If Asset XYZ's price falls below $100, the investor (who sells this futures contract) is protected because she will receive $100 upon delivery of the asset to satisfy the futures contract. 
C)  If Asset XYZ's price rises above $100, the investor (who sells this futures contract) will not realize the price appreciation because she must deliver the asset for an agreed-upon amount of $100. 
D)  By selling the futures contract, the investor has locked in a price of $100, and fails to realize a gain if the price declines while avoiding a loss if the price rises.

Question 19

The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer).

Accepted Answer

A)  same as 
B)  the identical image of 
C)  mirror image of 
D)  All of these 
A)  same as 
B)  the identical image of 
C)  mirror image of 
D)  All of these

Question 20

The date after which an option is void is called the ________.

Accepted Answer

A)  termination date. 
B)  maturity date. 
C)  cessation date. 
D)  expiration period. 
A)  termination date. 
B)  maturity date. 
C)  cessation date. 
D)  expiration period.

Exam 27: Options Markets

Exchange-traded options on futures that are based on debt instruments have been far less popular than exchange-traded options on physicals.

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $3 per share. Suppose that on the expiration date, the current price is $49. What is your net profit or loss per share?

There are interest rate options in which the underlying is a debt instrument (called an option on a physical) and a futures contract (called a futures option).

In regards to long-term equity anticipation securities (LEAPS), which of the below statements is TRUE?

In the case of a ________, both buyer and seller are obligated to perform.

The maximum amount that an option buyer can lose is the ________ price. The maximum profit that the option writer (seller) can realize is the ________ price.

Describe and summarize the meaning of the four option positions.

In an option contract, the writer of the option grants the buyer of the option the ________, but not the ________, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date).

Suppose you purchase a put option on Asset XYZ that has an exercise price of $40. The option price is $2 per share. Suppose that on the expiration date, the current price is $39. What is your net profit or loss?

________ can be used to ________ against a decline in the price of the ________ instrument.

In determining the payoff from an option, the time value of money as a result of having to finance the option price must be considered.

Which of the below statements is FALSE?

In regards to interest rate options, which of the below statements is TRUE?

Which of the below statements is FALSE?

The buyer of a put option benefits if the price of the underlying is unchanged or rises.

Which of the below statements is FALSE?

One distinction between futures and options contracts is that ________ to an option contract ________ to transact at a later date.

Suppose that a futures contract with Asset XYZ as the underlying instrument has a futures price equal to $100 and a settlement date one month from now. Which of the below statement is FALSE for an investor who SELLS this futures contract?

The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer).

The date after which an option is void is called the ________.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

The maximum amount that an option buyer can lose is the price. The maximum profit that the option writer (seller) can realize is the price.

In an option contract, the writer of the option grants the buyer of the option the , but not the , to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date).

can be used to against a decline in the price of the instrument.

One distinction between futures and options contracts is that to an option contract to transact at a later date.