Question 1

The Options Clearing Corporation does not ensure fulfillment of option obligations.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements regarding options is true?

Accepted Answer

A) An American option's premium should not decline below its intrinsic value. 
B) If a call is in the money,its time value is zero. 
C) The speculative premium reflects the option's immediate value. 
D) If a call is out of the money,its time value is zero. 
A) An American option's premium should not decline below its intrinsic value. 
B) If a call is in the money,its time value is zero. 
C) The speculative premium reflects the option's immediate value. 
D) If a call is out of the money,its time value is zero.

Question 3

Gordon is considering purchasing either a call or a put option on XYZ stock.Each of the options has an exercise price of $40 and XYZ is trading at $44.50 per share.Which of the following statements about the options is correct?

Accepted Answer

A) The put option is in the money,whereas the call option is out of the money. 
B) The call option is in the money,whereas the put option is out of the money. 
C) Both the put and the call option are in the money. 
D) Both the put and the call option are out of the money. 
A) The put option is in the money,whereas the call option is out of the money. 
B) The call option is in the money,whereas the put option is out of the money. 
C) Both the put and the call option are in the money. 
D) Both the put and the call option are out of the money.

Question 4

The exercise price on an option is also known as the:

Accepted Answer

A) premium. 
B) strike price. 
C) theoretical value. 
D) spot price. 
A) premium. 
B) strike price. 
C) theoretical value. 
D) spot price.

Question 5

An investor wants to hedge the Microsoft stock he holds in his portfolio.How can he use a protective put to do this?

Accepted Answer

The investor owns the stock and will pro

Question 6

Walt wrote a put option that had a $15 strike price on ABC stock when the stock price was $16 per share.The option premium was $3.What is the maximum profit (per share)that Walt can make on his option position?

Accepted Answer

A) $2 
B) $3 
C) $15 
D) $16 
A) $2 
B) $3 
C) $15 
D) $16

Question 7

What are the variables in the Black-Scholes option pricing model?How is each related to the price of the call option?

Accepted Answer

Price of underlying stock.The higher the

Question 8

One important reason for the existence of derivatives is that they:

Accepted Answer

A) help reduce market volatility by making speculation more difficult. 
B) have valuable tax benefits. 
C) contribute to market completeness. 
D) are risk-free. 
A) help reduce market volatility by making speculation more difficult. 
B) have valuable tax benefits. 
C) contribute to market completeness. 
D) are risk-free.

Question 9

A writer of a call can terminate the contract before expiration by:

Accepted Answer

A) writing a second call. 
B) buying a put. 
C) buying a comparable call. 
D) writing a put. 
A) writing a second call. 
B) buying a put. 
C) buying a comparable call. 
D) writing a put.

Question 10

Put and call options on gold are considered:

Accepted Answer

A) commodity derivatives. 
B) financial derivatives. 
C) forward contracts. 
D) futures contracts. 
A) commodity derivatives. 
B) financial derivatives. 
C) forward contracts. 
D) futures contracts.

Question 11

Other things equal,after an option is created,its:

Accepted Answer

A) time value approaches zero as time passes. 
B) time value increases into its expiration date. 
C) value moves inversely with the volatility of the underlying stock. 
D) value will be zero whenever it is out of the money. 
A) time value approaches zero as time passes. 
B) time value increases into its expiration date. 
C) value moves inversely with the volatility of the underlying stock. 
D) value will be zero whenever it is out of the money.

Question 12

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is true regarding American and European options?

Accepted Answer

A) American options can be exercised only at expiration. 
B) American options can be exercised only in the last week prior to expiration. 
C) European options can be exercised only at expiration. 
D) European options can be exercised any time prior to expiration. 
A) American options can be exercised only at expiration. 
B) American options can be exercised only in the last week prior to expiration. 
C) European options can be exercised only at expiration. 
D) European options can be exercised any time prior to expiration.

Question 14

The writer of a naked call faces:

Accepted Answer

A) an unlimited potential loss. 
B) a specified potential loss. 
C) no chance of loss because this is a conservative strategy. 
D) an unlimited potential gain. 
A) an unlimited potential loss. 
B) a specified potential loss. 
C) no chance of loss because this is a conservative strategy. 
D) an unlimited potential gain.

Question 15

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Accepted Answer

Put and call options offer leverage comp

Question 16

An option is a wasting asset because as its expiration date approaches,its:

Accepted Answer

A) intrinsic value approaches zero. 
B) time value approaches zero. 
C) intrinsic value approaches its time value. 
D) price approaches zero. 
A) intrinsic value approaches zero. 
B) time value approaches zero. 
C) intrinsic value approaches its time value. 
D) price approaches zero.

Question 17

If the price of the common stock exceeds the exercise price of a call,the call is said to be:

Accepted Answer

A) naked. 
B) out of the money. 
C) in the money. 
D) covered. 
A) naked. 
B) out of the money. 
C) in the money. 
D) covered.

Question 18

Which of the following statements about call options is false?

Accepted Answer

A) A call is in the money if the stock price exceeds the exercise price. 
B) A call has no time value if its intrinsic value is zero. 
C) If a call is out of the money,its intrinsic value is zero. 
D) If a call is in the money,its intrinsic value is zero. 
A) A call is in the money if the stock price exceeds the exercise price. 
B) A call has no time value if its intrinsic value is zero. 
C) If a call is out of the money,its intrinsic value is zero. 
D) If a call is in the money,its intrinsic value is zero.

Question 19

A stock has a price of $68 per share.A two-month put (strike price = $70)on the stock is available at a $6 premium.The intrinsic value on the put is:

Accepted Answer

A) $0 and its time value is $6. 
B) $0 and its time value is $4. 
C) $2 and its time value is $4. 
D) $4 and its time value is $2. 
A) $0 and its time value is $6. 
B) $0 and its time value is $4. 
C) $2 and its time value is $4. 
D) $4 and its time value is $2.

Question 20

Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?

Accepted Answer

A) A speculator 
B) A call writer 
C) A put writer 
D) An arbitrageur 
A) A speculator 
B) A call writer 
C) A put writer 
D) An arbitrageur

Exam 19: Options

The Options Clearing Corporation does not ensure fulfillment of option obligations.

Which of the following statements regarding options is true?

Gordon is considering purchasing either a call or a put option on XYZ stock.Each of the options has an exercise price of $40 and XYZ is trading at $44.50 per share.Which of the following statements about the options is correct?

The exercise price on an option is also known as the:

An investor wants to hedge the Microsoft stock he holds in his portfolio.How can he use a protective put to do this?

Walt wrote a put option that had a $15 strike price on ABC stock when the stock price was $16 per share.The option premium was $3.What is the maximum profit (per share)that Walt can make on his option position?

What are the variables in the Black-Scholes option pricing model?How is each related to the price of the call option?

One important reason for the existence of derivatives is that they:

A writer of a call can terminate the contract before expiration by:

Put and call options on gold are considered:

Other things equal,after an option is created,its:

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Which of the following statements is true regarding American and European options?

The writer of a naked call faces:

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

An option is a wasting asset because as its expiration date approaches,its:

If the price of the common stock exceeds the exercise price of a call,the call is said to be:

Which of the following statements about call options is false?

A stock has a price of $68 per share.A two-month put (strike price = $70)on the stock is available at a $6 premium.The intrinsic value on the put is:

Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?

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