Question 1

To provide insurance against declining prices on previously purchased stock,an investor could:

Accepted Answer

A) buy a call. 
B) write a put. 
C) buy a stock index option. 
D) buy a put. 
A) buy a call. 
B) write a put. 
C) buy a stock index option. 
D) buy a put. D

Question 2

How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?

Accepted Answer

The owner of a portfolio may enhance the portfolio's income by writing calls for the premium received.If the purchaser exercises the option,however,the writer will have to deliver the stock.

Question 3

Which of the following is not a determinant of the value of a call option in the Black-Scholes model?

Accepted Answer

A) The interest rate 
B) The exercise price of the stock 
C) The price of the underlying stock 
D) The beta of the underlying stock 
A) The interest rate 
B) The exercise price of the stock 
C) The price of the underlying stock 
D) The beta of the underlying stock D

Question 4

Gwen wrote a put option with a $15 strike price on RDX stock when the stock price was $16 per share.The option premium was $3.What is the maximum loss (per share)that Gwen could experience on her option position?

Accepted Answer

A) $3 
B) $12 
C) $14 
D) $15 
A) $3 
B) $12 
C) $14 
D) $15

Question 5

Which of the following statements is true regarding the writer of a call contract?

Accepted Answer

A) The call writer expects the stock to move upward. 
B) The call writer expects the stock to remain the same or move down. 
C) The call writer expects the stock to split. 
D) The call writer expects to sell the stock prior to expiration of the option. 
A) The call writer expects the stock to move upward. 
B) The call writer expects the stock to remain the same or move down. 
C) The call writer expects the stock to split. 
D) The call writer expects to sell the stock prior to expiration of the option.

Question 6

Which of the following statements is true regarding equity options contracts?

Accepted Answer

A) The majority of options contracts are standardized. 
B) Investors typically create options contracts to trade amongst themselves. 
C) Options contracts are typically customized to suit the needs of each investor. 
D) Options are available on all publicly-traded U.S.stocks. 
A) The majority of options contracts are standardized. 
B) Investors typically create options contracts to trade amongst themselves. 
C) Options contracts are typically customized to suit the needs of each investor. 
D) Options are available on all publicly-traded U.S.stocks.

Question 7

How could an investor create 100 shares of artificial stock (i.e. ,a portfolio with the same payoffs as 100 shares of common stock)?

Accepted Answer

Buy 1 long call and write 1 put contract

Question 8

Texa Inc.is trading at $23 per share and has options available with a $30 strike price.Which of the following options will have the highest premium?

Accepted Answer

A) A call option on Texa with a 1-month expiration 
B) A put option on Texa with a 1-month expiration 
C) A call option on Texa with a 3-month expiration 
D) A put option on Texa with a 3-month expiration 
A) A call option on Texa with a 1-month expiration 
B) A put option on Texa with a 1-month expiration 
C) A call option on Texa with a 3-month expiration 
D) A put option on Texa with a 3-month expiration

Question 9

Stock A has a volatile price history,and Stock B has a stable price history.Stock A and Stock B are both trading at $25 per share.Which of the following 1-month options should sell for the highest price?

Accepted Answer

A) A call option on Stock A with a $30 exercise price. 
B) A call option on Stock B with a $30 exercise price. 
C) A put option on Stock A with a $30 exercise price. 
D) A put option on Stock B with a $30 exercise price. 
A) A call option on Stock A with a $30 exercise price. 
B) A call option on Stock B with a $30 exercise price. 
C) A put option on Stock A with a $30 exercise price. 
D) A put option on Stock B with a $30 exercise price.

Question 10

In the Black-Scholes option pricing model:

Accepted Answer

A) all of the inputs except two are observable. 
B) all of the inputs except one are observable. 
C) none of the inputs in the model are observable. 
D) all of the inputs in the model are observable. 
A) all of the inputs except two are observable. 
B) all of the inputs except one are observable. 
C) none of the inputs in the model are observable. 
D) all of the inputs in the model are observable.

Question 11

The standard option contract is for:

Accepted Answer

A) 10 shares of stock. 
B) 50 shares of stock. 
C) 100 shares of stock. 
D) 1 share of stock. 
A) 10 shares of stock. 
B) 50 shares of stock. 
C) 100 shares of stock. 
D) 1 share of stock.

Question 12

For Gordon to maximize his potential return from a bearish view on a stock,he should:

Accepted Answer

A) buy calls. 
B) write calls. 
C) buy puts. 
D) write puts. 
A) buy calls. 
B) write calls. 
C) buy puts. 
D) write puts.

Question 13

An option buyer has three courses of action available: write a similar option to close the position,exercise the option,or let the option expire unexercised.

Accepted Answer

A) True 
 B)False

Question 14

What type of equity derivatives are created by corporations?

Accepted Answer

The answer of What type of equity derivatives are created...

Question 15

Concerning stock index options,which of the following statements is false?

Accepted Answer

A) Index options appeal to speculators due to the leverage they offer. 
B) Investors can write index options. 
C) If exercised,the holder of a stock index call receives the underlying stock. 
D) Index options are settled in cash. 
A) Index options appeal to speculators due to the leverage they offer. 
B) Investors can write index options. 
C) If exercised,the holder of a stock index call receives the underlying stock. 
D) Index options are settled in cash.

Question 16

Options can be purchased on margin.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following inputs in the Black-Scholes option pricing model is not observed?

Accepted Answer

A) The interest rate 
B) The time to expiration 
C) The stock price 
D) The variability of the stock 
A) The interest rate 
B) The time to expiration 
C) The stock price 
D) The variability of the stock

Question 18

An investor wants to hedge the Apple stock he holds in his portfolio.How can he use a covered call to do this?

Accepted Answer

The investor owns the stock and will pro

Question 19

Sam is considering purchasing a call option on ABC stock.The call has a premium of $3,an exercise price of $50,and ABC is trading at $51 per share.Which of the following statements about the call option is correct?

Accepted Answer

A) The call has an intrinsic value of $1 and a time value of $2. 
B) The call has an intrinsic value of $0 and a time value of $3. 
C) The call has an intrinsic value of $3 and a time value of $2. 
D) The call has an intrinsic value of $0 and a time value of $1. 
A) The call has an intrinsic value of $1 and a time value of $2. 
B) The call has an intrinsic value of $0 and a time value of $3. 
C) The call has an intrinsic value of $3 and a time value of $2. 
D) The call has an intrinsic value of $0 and a time value of $1.

Question 20

?Options traded on organized exchanges are protected against cash dividends.

Accepted Answer

A) True 
 B)False

Exam 19: Options

To provide insurance against declining prices on previously purchased stock,an investor could:

How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?

Which of the following is not a determinant of the value of a call option in the Black-Scholes model?

Gwen wrote a put option with a $15 strike price on RDX stock when the stock price was $16 per share.The option premium was $3.What is the maximum loss (per share)that Gwen could experience on her option position?

Which of the following statements is true regarding the writer of a call contract?

Which of the following statements is true regarding equity options contracts?

How could an investor create 100 shares of artificial stock (i.e. ,a portfolio with the same payoffs as 100 shares of common stock)?

Texa Inc.is trading at $23 per share and has options available with a $30 strike price.Which of the following options will have the highest premium?

Stock A has a volatile price history,and Stock B has a stable price history.Stock A and Stock B are both trading at $25 per share.Which of the following 1-month options should sell for the highest price?

In the Black-Scholes option pricing model:

The standard option contract is for:

For Gordon to maximize his potential return from a bearish view on a stock,he should:

An option buyer has three courses of action available: write a similar option to close the position,exercise the option,or let the option expire unexercised.

What type of equity derivatives are created by corporations?

Concerning stock index options,which of the following statements is false?

Options can be purchased on margin.

Which of the following inputs in the Black-Scholes option pricing model is not observed?

An investor wants to hedge the Apple stock he holds in his portfolio.How can he use a covered call to do this?

Sam is considering purchasing a call option on ABC stock.The call has a premium of $3,an exercise price of $50,and ABC is trading at $51 per share.Which of the following statements about the call option is correct?

?Options traded on organized exchanges are protected against cash dividends.

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