Question 1

Corporations involved in international business transactions can ____ to hedge future ____.

Accepted Answer

A)  sell currency call options; payables 
B)  purchase currency put options; receivables 
C)  purchase currency call options, receivables 
D)  purchase currency put options, payables 
E)  A and B 
A)  sell currency call options; payables 
B)  purchase currency put options; receivables 
C)  purchase currency call options, receivables 
D)  purchase currency put options, payables 
E)  A and B B

Question 2

Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date when the stock price was lower.

Accepted Answer

A) True 
 B)False  True

Question 3

Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile.

Accepted Answer

A) True 
 B)False  True

Question 4

Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.

Accepted Answer

A)  available; in numerous non-U.S. countries 
B)  not available; in numerous non-U.S. countries 
C)  available; only in the United States 
D)  not available; only in the United States 
A)  available; in numerous non-U.S. countries 
B)  not available; in numerous non-U.S. countries 
C)  available; only in the United States 
D)  not available; only in the United States

Question 5

Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent.

Accepted Answer

A)  5,300; 366 
B)  11,000; 27 
C)  -5000; -167 
D)  5,000; 167 
E)  None of the above 
A)  5,300; 366 
B)  11,000; 27 
C)  -5000; -167 
D)  5,000; 167 
E)  None of the above

Question 6

The premium on an existing put option should ____ when the underlying stock price increases.

Accepted Answer

A)  be negative 
B)  decline 
C)  increase 
D)  be unaffected 
E)  A and B 
A)  be negative 
B)  decline 
C)  increase 
D)  be unaffected 
E)  A and B

Question 7

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility.

Accepted Answer

A) True 
 B)False

Question 8

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.

Accepted Answer

A)  reduce 
B)  completely eliminate 
C)  have no effect on 
D)  increase 
A)  reduce 
B)  completely eliminate 
C)  have no effect on 
D)  increase

Question 9

The ____ is the most important exchange for trading options.

Accepted Answer

A)  New York Stock Exchange (NYS
E)  
B)  Chicago Board Options Exchange (CBO
E)  
C)  Boston Options Exchange 
D)  NYSE MKT 
A)  New York Stock Exchange (NYS
E)  
B)  Chicago Board Options Exchange (CBO
E)  
C)  Boston Options Exchange 
D)  NYSE MKT

Question 10

Which of the following statements is least correct regarding corporations involved in international business transactions?

Accepted Answer

A)  They may purchase currency put options to hedge future receivables denominated in a foreign currency. 
B)  They may purchase currency call options to hedge future payables denominated in a foreign currency. 
C)  They may purchase currency call options to hedge future receivables denominated in a foreign currency. 
D)  They benefit from currency put options if the currency's value declines before the expiration date of the option. 
A)  They may purchase currency put options to hedge future receivables denominated in a foreign currency. 
B)  They may purchase currency call options to hedge future payables denominated in a foreign currency. 
C)  They may purchase currency call options to hedge future receivables denominated in a foreign currency. 
D)  They benefit from currency put options if the currency's value declines before the expiration date of the option.

Question 11

Which of the following statements is incorrect?

Accepted Answer

A)  Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower. 
B)  Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price. 
C)  Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense. 
D)  All of the above are correct. 
A)  Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower. 
B)  Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price. 
C)  Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense. 
D)  All of the above are correct.

Question 12

Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie's net gain from this strategy is $____.

Accepted Answer

A)  -2,687.50 
B)  2,687.50 
C)  2,375.00 
D)  7,437.50 
E)  none of the above 
A)  -2,687.50 
B)  2,687.50 
C)  2,375.00 
D)  7,437.50 
E)  none of the above

Question 13

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium.

Accepted Answer

A)  higher; lower 
B)  lower; higher 
C)  higher; higher 
D)  lower; lower 
A)  higher; lower 
B)  lower; higher 
C)  higher; higher 
D)  lower; lower

Question 14

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

Accepted Answer

A)  -$4 
B)  -$3 
C)  -$2 
D)  $2 
E)  $3 
A)  -$4 
B)  -$3 
C)  -$2 
D)  $2 
E)  $3

Question 15

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

Accepted Answer

A)  put; strengthen 
B)  put; weaken 
C)  call; strengthen 
D)  call; weaken 
E)  A and D 
A)  put; strengthen 
B)  put; weaken 
C)  call; strengthen 
D)  call; weaken 
E)  A and D

Question 16

A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not a difference between purchasing an option and purchasing a futures contract?

Accepted Answer

A)  The option requires that a premium be paid in addition to the price of the financial instrument. 
B)  Owners of options can choose to let the option expire on the so-called expiration date without exercising it. 
C)  The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not. 
D)  All of the above are differences between purchasing an option and purchasing a futures 
A)  The option requires that a premium be paid in addition to the price of the financial instrument. 
B)  Owners of options can choose to let the option expire on the so-called expiration date without exercising it. 
C)  The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not. 
D)  All of the above are differences between purchasing an option and purchasing a futures

Question 18

Market makers can execute stock option transactions for customers but do not trade stock options for their own account.

Accepted Answer

A) True 
 B)False

Question 19

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

Accepted Answer

A)  higher; lower 
B)  lower; higher 
C)  higher; higher 
D)  lower; lower 
A)  higher; lower 
B)  lower; higher 
C)  higher; higher 
D)  lower; lower

Question 20

The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price.

Accepted Answer

A) True 
 B)False

Exam 14: Options Markets

Corporations involved in international business transactions can ____ to hedge future ____.

Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date when the stock price was lower.

Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile.

Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.

The premium on an existing put option should ____ when the underlying stock price increases.

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility.

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.

The ____ is the most important exchange for trading options.

Which of the following statements is least correct regarding corporations involved in international business transactions?

Which of the following statements is incorrect?

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium.

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level.

Which of the following is not a difference between purchasing an option and purchasing a futures contract?

Market makers can execute stock option transactions for customers but do not trade stock options for their own account.

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

Pension Fund Operations

Filters

Corporations involved in international business transactions can to hedge future .

Options on stock indexes representing non-U.S. stocks are ; options exchanges have been established .

The greater the volatility of the underlying stock, the the call option premium and the the put option premium.

Speculators may be willing to write options on foreign currencies they expect to against the dollar.

The longer the time to maturity, the the call option premium and the the put option premium.