Question 1

When the option buyer has the right to sell the underlying to the writer, the option is called a ________.

Accepted Answer

A)  call option. 
B)  put obligation. 
C)  exercise option. 
D)  put option. 
A)  call option. 
B)  put obligation. 
C)  exercise option. 
D)  put option.

Question 2

In regards to the writing (selling) of put options, which of the below statements is TRUE?

Accepted Answer

A)  The profit and loss profile for a short put option is the mirror image of the long put option. 
B)  The theoretical maximum loss can be substantial should the price of the underlying asset fall; at the outside, if the price were to fall all the way to zero, the loss would be as large as the strike price less the option price. 
C)  The profit and loss profile for a short put option is the mirror image of the long put option with the maximum profit from this position being the option price 
D)  All of these 
A)  The profit and loss profile for a short put option is the mirror image of the long put option. 
B)  The theoretical maximum loss can be substantial should the price of the underlying asset fall; at the outside, if the price were to fall all the way to zero, the loss would be as large as the strike price less the option price. 
C)  The profit and loss profile for a short put option is the mirror image of the long put option with the maximum profit from this position being the option price 
D)  All of these

Question 3

Which of the below statements is TRUE?

Accepted Answer

A)  In the case of a futures contract, the buyer of the contract realizes a dollar-for-dollar loss when the price of the futures contract increases. 
B)  The maximum profit that the writer (seller) of an option may realize is the option price; this is offset against substantial downside risk. 
C)  In the case of a futures contract, the buyer of the contract suffers a dollar-for-dollar loss when the price of the futures contract rises. 
D)  The risk/reward characteristics of a futures contract and an option contract are identical. 
A)  In the case of a futures contract, the buyer of the contract realizes a dollar-for-dollar loss when the price of the futures contract increases. 
B)  The maximum profit that the writer (seller) of an option may realize is the option price; this is offset against substantial downside risk. 
C)  In the case of a futures contract, the buyer of the contract suffers a dollar-for-dollar loss when the price of the futures contract rises. 
D)  The risk/reward characteristics of a futures contract and an option contract are identical.

Question 4

Options allow the investor to mold a risk/return relationship.

Accepted Answer

A) True 
 B)False

Question 5

Like a futures contract, only one party to an option contract is obligated to transact at a later date: the option writer.

Accepted Answer

A) True 
 B)False

Question 6

Comment on the differences between futures and options contracts.

Accepted Answer

One distinction between futures and opti

Question 7

Which of the below statements is TRUE?

Accepted Answer

A)  Illustrations of the four option positions take into account the time value of money. 
B)  The breakeven price for the underlying asset at the expiration date is lower for the buyer of the option; for the seller, it is higher. 
C)  The buyer of a call option is not entitled to any interim cash flows generated by the underlying asset. 
D)  All of these 
A)  Illustrations of the four option positions take into account the time value of money. 
B)  The breakeven price for the underlying asset at the expiration date is lower for the buyer of the option; for the seller, it is higher. 
C)  The buyer of a call option is not entitled to any interim cash flows generated by the underlying asset. 
D)  All of these

Question 8

Differentiate between a call option and a put option.

Accepted Answer

When an option grants the buyer the righ

Question 9

Which of the below statements is TRUE?

Accepted Answer

A)  A put option can be used to protect against a rise in the price of the underlying instrument while maintaining the opportunity to benefit from a decline in the price of the underlying instrument. 
B)  Hedging with options never differ from hedging with futures. 
C)  Hedging with futures involves trading off the benefits of a favorable price movement for protection against an adverse price movement. 
D)  None of these 
A)  A put option can be used to protect against a rise in the price of the underlying instrument while maintaining the opportunity to benefit from a decline in the price of the underlying instrument. 
B)  Hedging with options never differ from hedging with futures. 
C)  Hedging with futures involves trading off the benefits of a favorable price movement for protection against an adverse price movement. 
D)  None of these

Question 10

Options have a symmetric risk/reward relationship, while futures do not because the buyer of an option retains all the potential benefits, but the gain is always reduced by the amount of the option price.

Accepted Answer

A) True 
 B)False

Question 11

There are three reasons why futures options on fixed-income securities have largely supplanted options on physicals as the options vehicle used by institutional investors. Describe two of these three reasons.

Accepted Answer

Below are three reasons why futures opti

Question 12

Suppose you purchase a call option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $106. What is your net profit or loss per share?

Accepted Answer

A)  -$3.00 
B)  $0.00 
C)  $3.00 
D)  $6.00 
A)  -$3.00 
B)  $0.00 
C)  $3.00 
D)  $6.00

Question 13

In regards to stock index options, which of the below statements is TRUE?

Accepted Answer

A)  There are not options on stock index futures. 
B)  Options on stock index futures are more widely used than options on stock indexes. 
C)  Options on futures contracts are the contracts of choice in the interest rate options market. 
D)  None of these 
A)  There are not options on stock index futures. 
B)  Options on stock index futures are more widely used than options on stock indexes. 
C)  Options on futures contracts are the contracts of choice in the interest rate options market. 
D)  None of these

Question 14

A call option gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option.

Accepted Answer

A) True 
 B)False

Question 15

The dollar value of a stock index option contract is equal to the index value divided by the contract's multiple.

Accepted Answer

A) True 
 B)False

Question 16

The maximum amount that an option buyer can lose is the option price, while the maximum profit that the option writer can realize is the option price; the option buyer has substantial upside return potential, while the option writer has substantial downside risk.

Accepted Answer

A) True 
 B)False

Question 17

Describe an outperformance option and illustrate with an example.

Accepted Answer

An outperformance option is an option wh

Question 18

There are four basic option positions: buying a call option, selling a call option, buying a put option, and selling a put option.

Accepted Answer

A) True 
 B)False

Question 19

Simple OTC options are called exotic options.

Accepted Answer

A) True 
 B)False

Question 20

An option on a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract ________.

Accepted Answer

A)  at an uncertain price on the expiration date. 
B)  at a random price at any time during the life of the option. 
C)  at a designated price at a specified time during the life of the option. 
D)  at a designated price at any time during the life of the option. 
A)  at an uncertain price on the expiration date. 
B)  at a random price at any time during the life of the option. 
C)  at a designated price at a specified time during the life of the option. 
D)  at a designated price at any time during the life of the option.

Exam 27: Options Markets

When the option buyer has the right to sell the underlying to the writer, the option is called a ________.

In regards to the writing (selling) of put options, which of the below statements is TRUE?

Which of the below statements is TRUE?

Options allow the investor to mold a risk/return relationship.

Like a futures contract, only one party to an option contract is obligated to transact at a later date: the option writer.

Comment on the differences between futures and options contracts.

Which of the below statements is TRUE?

Differentiate between a call option and a put option.

Which of the below statements is TRUE?

Options have a symmetric risk/reward relationship, while futures do not because the buyer of an option retains all the potential benefits, but the gain is always reduced by the amount of the option price.

There are three reasons why futures options on fixed-income securities have largely supplanted options on physicals as the options vehicle used by institutional investors. Describe two of these three reasons.

Suppose you purchase a call option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $106. What is your net profit or loss per share?

In regards to stock index options, which of the below statements is TRUE?

A call option gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option.

The dollar value of a stock index option contract is equal to the index value divided by the contract's multiple.

The maximum amount that an option buyer can lose is the option price, while the maximum profit that the option writer can realize is the option price; the option buyer has substantial upside return potential, while the option writer has substantial downside risk.

Describe an outperformance option and illustrate with an example.

There are four basic option positions: buying a call option, selling a call option, buying a put option, and selling a put option.

Simple OTC options are called exotic options.

An option on a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract ________.

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

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