Question 1

There is a positive relationship between the price of a put option and the volatility of the underlying common stock.

Accepted Answer

A) True 
 B)False

Question 2

Options sold on exchanges are protected against:

Accepted Answer

A) stock dividends and splits. 
B) cash dividends. 
C) interest rate movements. 
D) inflation. 
A) stock dividends and splits. 
B) cash dividends. 
C) interest rate movements. 
D) inflation.

Question 3

What is put-call parity?How is it related to arbitrage?

Accepted Answer

This principle expresses the relationshi

Question 4

The Options Clearing Corporation (OCC):

Accepted Answer

A) always has a net position of zero. 
B) acts as a dealer in options,standing ready to buy or sell from its inventory. 
C) selects the broker with the largest holdings to honor the exercise of an option. 
D) uses first in,first out to select a broker to honor the exercise of an option. 
A) always has a net position of zero. 
B) acts as a dealer in options,standing ready to buy or sell from its inventory. 
C) selects the broker with the largest holdings to honor the exercise of an option. 
D) uses first in,first out to select a broker to honor the exercise of an option.

Question 5

Carl purchased a call option on Apex stock that had a premium of $4,an exercise price of $25,and six-months to expiration.When he purchased the option,Apex was selling at $27 per share.What profit (per share)would Carl earn on his option transaction if Apex sells at $31 per share at expiration?

Accepted Answer

A) $0 
B) $2 
C) $4 
D) $6 
A) $0 
B) $2 
C) $4 
D) $6

Question 6

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

Accepted Answer

All contracts are effectively

Question 7

List five options exchanges.

Accepted Answer

Chicago Board Options Exchange

Question 8

What is a hedge ratio?

Accepted Answer

The hedge ratio for a call is N(d₁)from

Question 9

LEAPS are typically:

Accepted Answer

A) more expensive than short-term options. 
B) cheaper than short-term options. 
C) only available for major indexes,not individual stocks. 
D) long-term options,with maturities between 5 and 10 years. 
A) more expensive than short-term options. 
B) cheaper than short-term options. 
C) only available for major indexes,not individual stocks. 
D) long-term options,with maturities between 5 and 10 years.

Question 10

With regard to options,which of the following is not true of the hedge ratio?

Accepted Answer

A) It indicates the change in the option price for a $1 change in stock price. 
B) It represents the ratio of options written to shares held long in a riskless portfolio. 
C) It is frequently greater than 1. 
D) It is commonly referred to as the option's delta. 
A) It indicates the change in the option price for a $1 change in stock price. 
B) It represents the ratio of options written to shares held long in a riskless portfolio. 
C) It is frequently greater than 1. 
D) It is commonly referred to as the option's delta.

Question 11

If the price of the underlying stock equals the strike price of the call option at maturity,the call buyer has a breakeven transaction.

Accepted Answer

A) True 
 B)False

Question 12

John plans to acquire shares of ABC Corp.by purchasing and exercising a call option.Which of the following statements regarding John's strategy is correct?

Accepted Answer

A) John will experience no gain or loss from implementing the strategy. 
B) John faces no risk from the strategy. 
C) If John implements the strategy,it will not impact ABC's shares outstanding. 
D) John will pay no commission to implement the strategy. 
A) John will experience no gain or loss from implementing the strategy. 
B) John faces no risk from the strategy. 
C) If John implements the strategy,it will not impact ABC's shares outstanding. 
D) John will pay no commission to implement the strategy.

Question 13

According to the Black Scholes option pricing model,option value is a function of stock price,exercise price,time to maturity,interest rate,and volatility of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 14

To hedge a short sale,an investor could:

Accepted Answer

A) buy a call. 
B) write a call. 
C) buy a put. 
D) write a put. 
A) buy a call. 
B) write a call. 
C) buy a put. 
D) write a put.

Question 15

The way to protect a stock portfolio from a bear market is to:

Accepted Answer

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

Question 16

For Grace to maximize her potential return from a bullish view on a stock,she should:

Accepted Answer

A) buy calls on the stock. 
B) write calls on the stock. 
C) buy puts on the stock. 
D) write puts on the stock. 
A) buy calls on the stock. 
B) write calls on the stock. 
C) buy puts on the stock. 
D) write puts on the stock.

Question 17

What is meant by portfolio insurance?

Accepted Answer

Portfolio insurance involves strategies

Question 18

Which of the following statements about portfolio insurance is false?

Accepted Answer

A) There are several methods of insuring a portfolio. 
B) It seeks to provide a minimum return while offering the opportunity to
Participate in rising prices. 
C) Futures are typically not used to hedge stock portfolios. 
D) Puts and calls typically are not used to insure portfolios. 
A) There are several methods of insuring a portfolio. 
B) It seeks to provide a minimum return while offering the opportunity to
Participate in rising prices. 
C) Futures are typically not used to hedge stock portfolios. 
D) Puts and calls typically are not used to insure portfolios.

Question 19

Which of the following is not a reason for investors to trade options?

Accepted Answer

A) Options eliminate leverage. 
B) Options require a smaller investment than stock investments. 
C) Options allow investors to trade on overall market movements. 
D) Options can reduce risk. 
A) Options eliminate leverage. 
B) Options require a smaller investment than stock investments. 
C) Options allow investors to trade on overall market movements. 
D) Options can reduce risk.

Question 20

Which of the following is true regarding option pricing?

Accepted Answer

A) The longer the maturity of the option,the higher the premium 
B) The more volatile the underlying stock,the lower the premium 
C) Option prices are less volatile than equity prices 
D) European options are more valuable than American options 
A) The longer the maturity of the option,the higher the premium 
B) The more volatile the underlying stock,the lower the premium 
C) Option prices are less volatile than equity prices 
D) European options are more valuable than American options

Exam 19: Options

There is a positive relationship between the price of a put option and the volatility of the underlying common stock.

Options sold on exchanges are protected against:

What is put-call parity?How is it related to arbitrage?

The Options Clearing Corporation (OCC):

Carl purchased a call option on Apex stock that had a premium of $4,an exercise price of $25,and six-months to expiration.When he purchased the option,Apex was selling at $27 per share.What profit (per share)would Carl earn on his option transaction if Apex sells at $31 per share at expiration?

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

List five options exchanges.

What is a hedge ratio?

LEAPS are typically:

With regard to options,which of the following is not true of the hedge ratio?

If the price of the underlying stock equals the strike price of the call option at maturity,the call buyer has a breakeven transaction.

John plans to acquire shares of ABC Corp.by purchasing and exercising a call option.Which of the following statements regarding John's strategy is correct?

According to the Black Scholes option pricing model,option value is a function of stock price,exercise price,time to maturity,interest rate,and volatility of the underlying asset.

To hedge a short sale,an investor could:

The way to protect a stock portfolio from a bear market is to:

For Grace to maximize her potential return from a bullish view on a stock,she should:

What is meant by portfolio insurance?

Which of the following statements about portfolio insurance is false?

Which of the following is not a reason for investors to trade options?

Which of the following is true regarding option pricing?

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