Question 1

A straddle is the simultaneous purchase (or sale)of a put and call option with the same underlying asset,

Accepted Answer

A)  Same exercise price, and expiration date. 
B)  Same exercise price but different expiration date. 
C)  Same expiration date but different exercise price. 
D)  Either choices b or c. 
E)  None of the above. 
A)  Same exercise price, and expiration date. 
B)  Same exercise price but different expiration date. 
C)  Same expiration date but different exercise price. 
D)  Either choices b or c. 
E)  None of the above.

Question 2

European options can only be exercised on the expiration date.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

Accepted Answer

A)  Future security price. 
B)  Exercise price. 
C)  Time to expiration. 
D)  Risk-free rate. 
E)  Security price volatility. 
A)  Future security price. 
B)  Exercise price. 
C)  Time to expiration. 
D)  Risk-free rate. 
E)  Security price volatility.

Question 4

Exhibit 22.3
Use the Information Below for the Following Problem(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Refer to Exhibit 22.3.Use the Black-Scholes option pricing model to calculate the price of a call option.

Accepted Answer

A)  $5.19 
B)  $4.35 
C)  $3.93 
D)  $6.19 
E)  $8.17 
A)  $5.19 
B)  $4.35 
C)  $3.93 
D)  $6.19 
E)  $8.17

Question 5

The entity that acts as the guarantor of each CBOE-traded contract is the

Accepted Answer

A)  Federal government 
B)  Securities and exchange commission 
C)  CBOE 
D)  Options clearing corporation 
E)  Federal reserve bank 
A)  Federal government 
B)  Securities and exchange commission 
C)  CBOE 
D)  Options clearing corporation 
E)  Federal reserve bank

Question 6

Exhibit 22.5
Use the Information Below for the Following Problem(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 22.5.Estimate n,the number of call options that must be written.

Accepted Answer

A)  -1.4286 
B)  -2.9286 
C)  -2.8571 
D)  -2.5714 
E)  -1.1111 
A)  -1.4286 
B)  -2.9286 
C)  -2.8571 
D)  -2.5714 
E)  -1.1111

Question 7

Exhibit 22.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c} 
&&\text{XYZ CORP}\
 & \quad\quad\quad\quad \text { Exercise } & & \quad\quad\quad\quad\quad\quad { \text { NYSE } } \
& \text { Date } & \text { Price } & \text { Price } & \text { Clase } \
\hline \text { Calls } & \text { OCT } & 85 & 163 / 4 & 101\quad11 / 16 \
& \text { OCT } & 90 & 12 & 101\quad11 / 16 \
& \text { OCT } & 95 & 75 / 8 & 101\quad11 / 16 \
\text { Puts } & \text { OCT } & 85 & 1 / 8 & 101\quad11 / 16 \
& \text { OCT } & 90 & 3 / 8 & 101\quad11 / 16 \
& \text { OCT } & 95 & 13 / 16 & 101\quad11 / 16
\end{array}$$
-Refer to Exhibit 22.2.If you establish a long straddle using the options with an 85 exercise price,what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $18.75 loss 
B)  $18.75 gain 
C)  $1,668.75 gain 
D)  $1,668.75 loss 
E)  $1,687.50 loss 
A)  $18.75 loss 
B)  $18.75 gain 
C)  $1,668.75 gain 
D)  $1,668.75 loss 
E)  $1,687.50 loss

Question 8

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 22.3
Use the Information Below for the Following Problem(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75,for tax purposes.You still wish to maintain exposure to the sold stock.Suppose that you buy a call with a strike price of $70 and a price of $6.75.Calculate the effective price paid to repurchase the stock if the price after 35 days is $80.

Accepted Answer

A)  $81.75 
B)  $73.25 
C)  $86.75 
D)  $76.75 
E)  None of the above 
A)  $81.75 
B)  $73.25 
C)  $86.75 
D)  $76.75 
E)  None of the above

Question 10

In the Black-Scholes option pricing model,an increase in security volatility (s)will cause

Accepted Answer

A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  A decrease in call value and an increase in put value 
D)  A decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value 
A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  A decrease in call value and an increase in put value 
D)  A decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value

Question 11

Exhibit 22.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c} 
&&\text{XYZ CORP}\
 & \quad\quad\quad\quad \text { Exercise } & & \quad\quad\quad\quad\quad\quad { \text { NYSE } } \
& \text { Date } & \text { Price } & \text { Price } & \text { Clase } \
\hline \text { Calls } & \text { OCT } & 85 & 163 / 4 & 101\quad11 / 16 \
& \text { OCT } & 90 & 12 & 101\quad11 / 16 \
& \text { OCT } & 95 & 75 / 8 & 101\quad11 / 16 \
\text { Puts } & \text { OCT } & 85 & 1 / 8 & 101\quad11 / 16 \
& \text { OCT } & 90 & 3 / 8 & 101\quad11 / 16 \
& \text { OCT } & 95 & 13 / 16 & 101\quad11 / 16
\end{array}$$
-Refer to Exhibit 22.2.If you establish a long straddle using the options with a 95 exercise price,what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $668.75 gain 
B)  $668.75 loss 
C)  $94.56 gain 
D)  $94.56 loss 
E)  $81.25 loss 
A)  $668.75 gain 
B)  $668.75 loss 
C)  $94.56 gain 
D)  $94.56 loss 
E)  $81.25 loss

Question 12

The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 22.3
Use the Information Below for the Following Problem(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk free rate is 3% over this time period, and the expected volatility is 0.35.
-Assume that you have just sold a stock for a loss at a price of $75,for tax purposes.You still wish to maintain exposure to the sold stock.Suppose that you sell a put with a strike price of $80 and a price of $7.25.Calculate the effective price paid to repurchase the stock if the price after 35 days is $85.

Accepted Answer

A)  $77.75 
B)  $87.25 
C)  $82.25 
D)  $72.75 
E)  None of the above. 
A)  $77.75 
B)  $87.25 
C)  $82.25 
D)  $72.75 
E)  None of the above.

Question 14

Exhibit 22.7
Use the Information Below for the Following Problem(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 22.7.What would the net value of a protective put position be if the stock price at expiration is $35?

Accepted Answer

A)  $3.10 
B)  $30.15 
C)  $32.10 
D)  $34.05 
E)  $35.00 
A)  $3.10 
B)  $30.15 
C)  $32.10 
D)  $34.05 
E)  $35.00

Question 15

Exhibit 22.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c} 
&&\text{XYZ CORP}\
 & \quad\quad\quad\quad \text { Exercise } & & \quad\quad\quad\quad\quad\quad { \text { NYSE } } \
& \text { Date } & \text { Price } & \text { Price } & \text { Clase } \
\hline \text { Calls } & \text { OCT } & 85 & 163 / 4 & 101\quad11 / 16 \
& \text { OCT } & 90 & 12 & 101\quad11 / 16 \
& \text { OCT } & 95 & 75 / 8 & 101\quad11 / 16 \
\text { Puts } & \text { OCT } & 85 & 1 / 8 & 101\quad11 / 16 \
& \text { OCT } & 90 & 3 / 8 & 101\quad11 / 16 \
& \text { OCT } & 95 & 13 / 16 & 101\quad11 / 16
\end{array}$$
-Refer to Exhibit 22.2.If you establish a long strip using the options with an 85 exercise price,what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $1,668.75 gain 
B)  $1,700.00 gain 
C)  $1,700.00 loss 
D)  $31.25 gain 
E)  $31.25 loss 
A)  $1,668.75 gain 
B)  $1,700.00 gain 
C)  $1,700.00 loss 
D)  $31.25 gain 
E)  $31.25 loss

Question 16

A strip is a call option on a stock that is written by someone that owns the stock.

Accepted Answer

A) True 
 B)False

Question 17

A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond.

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 22.8
Use the Information Below for the Following Problem(S)
Consider the following information on put and call options for a common stock
 $$\begin{array} { c c c } 
\text { Wtrike Price } & \text { Put Price } & \text { Call Price } \
\hline \$22.50 &\$ 2.65 & \$ 1.85
\end{array}$$
-Refer to Exhibit 22.8.Calculate the net value of a covered call position at an expiration stock price of $20.

Accepted Answer

A)  $1.85 
B)  $4.45 
C)  $18.15 
D)  $21.85 
E)  $24.35 
A)  $1.85 
B)  $4.45 
C)  $18.15 
D)  $21.85 
E)  $24.35

Question 19

Options on futures contracts are very popular because

Accepted Answer

A)  They require the holder to purchase at a future date 
B)  Of their ability to create leverage 
C)  The seller of the futures contract is under no obligation 
D)  The amount of the underlying commodity is negotiable 
E)  None of the above 
A)  They require the holder to purchase at a future date 
B)  Of their ability to create leverage 
C)  The seller of the futures contract is under no obligation 
D)  The amount of the underlying commodity is negotiable 
E)  None of the above

Question 20

Exhibit 22.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{|l|c|l|l|l|}
\hline \text { Option Type } & & \text { Currency } &{\text { Canadian dollar }} \
\hline \text { Contract Size } & & 50000 & {\text { Canadian dollars }} \
\hline \text { Expiry } & & \text { April } & & \
\hline & & & & \
\hline \text { Strike } & \text { Call } & \text { Put } & & \
\hline \$ 0.815 & \$ 0.0118 & & & \
\hline \$ 0.820 & & \$ 0.0068 & & \
\hline
\end{array}$
-Refer to Exhibit 22.1.If the spot rate at expiration is $0.85 and the put option was purchased,what is the dollar gain or loss?

Accepted Answer

A)  $340 loss 
B)  $125 gain 
C)  $750 gain 
D)  $750 loss 
E)  $200 loss 
A)  $340 loss 
B)  $125 gain 
C)  $750 gain 
D)  $750 loss 
E)  $200 loss

A straddle is the simultaneous purchase (or sale)of a put and call option with the same underlying asset,

European options can only be exercised on the expiration date.

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

The entity that acts as the guarantor of each CBOE-traded contract is the

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

In the Black-Scholes option pricing model,an increase in security volatility (s)will cause

The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.

A strip is a call option on a stock that is written by someone that owns the stock.

A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond.

Options on futures contracts are very popular because

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters

Exam 22: Option Contracts

A straddle is the simultaneous purchase (or sale)of a put and call option with the same underlying asset,

European options can only be exercised on the expiration date.

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

The entity that acts as the guarantor of each CBOE-traded contract is the

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

In the Black-Scholes option pricing model,an increase in security volatility (s)will cause

The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.

A strip is a call option on a stock that is written by someone that owns the stock.

A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond.

Options on futures contracts are very popular because

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters