Exam 14: Options Markets

Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Justprior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.

Which of the following is not true with respect to market makers?

Several call options are available for a given stock, and the risk-return potential will vary among them

Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes.

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.

The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal.

On an exchange, option trades can be executed

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even?

The sale of a call option on a stock the seller already owns is referred to as

____ execute transactions desired by investors and trade stock options for their own account.

When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."

Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value.

Speculators sell call options on currencies that they expect to strengthen against the dollar.

Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 timesthe index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?

Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk.

A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.

The longer a call option's time to maturity, the lower the call option premium, other things being equal.

The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option.

The ____, the higher the call option premium, other things being equal.