Question 1

When the market price of the underlying security exceeds the exercise price, a

Accepted Answer

A)  call option is in the money. 
B)  put option is in the money. 
C)  call option is at the money. 
D)  call option is out of the money. 
A)  call option is in the money. 
B)  put option is in the money. 
C)  call option is at the money. 
D)  call option is out of the money.

Question 2

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the calloption is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?

Accepted Answer

A)  $4 gain 
B)  $6 loss 
C)  $2 loss 
D)  $1 gain 
E)  $0 
A)  $4 gain 
B)  $6 loss 
C)  $2 loss 
D)  $1 gain 
E)  $0

Question 3

Which of the following is not an assumption underlying the Black-Scholes option-pricing model?

Accepted Answer

A)  The risk-free rate is known and constant over the life of the option. 
B)  The probability distribution of stock prices is lognormal. 
C)  The world is risk-neutral. 
D)  The variability of a stock's return is constant. 
E)  There are no transaction costs involved in trading options. 
A)  The risk-free rate is known and constant over the life of the option. 
B)  The probability distribution of stock prices is lognormal. 
C)  The world is risk-neutral. 
D)  The variability of a stock's return is constant. 
E)  There are no transaction costs involved in trading options.

Question 4

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 stock priceat which the speculator would break even?

Accepted Answer

A)  $26 
B)  $34 
C)  $28 
D)  $29 
E)  $32 
A)  $26 
B)  $34 
C)  $28 
D)  $29 
E)  $32

Question 5

An option with a higher exercise price has a higher call option premium and a lower put option premium.

Accepted Answer

A) True 
 B)False

Question 6

Option trading is regulated by the

Accepted Answer

A)  Options Clearing Corporation. 
B)  International Securities Exchange. 
C)  Securities and Exchange Commission. 
D)  Federal Reserve. 
A)  Options Clearing Corporation. 
B)  International Securities Exchange. 
C)  Securities and Exchange Commission. 
D)  Federal Reserve.

Question 7

The premium on an existing call option should ____ when there is an increase in the expected short-term volatility of the stock price.

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 8

The premium on an existing put option should ____ when there is a reduction in the expected short-term volatility of the stock price.

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 9

Reese Insurance company sold 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 Treasurybond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option 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 10

When a stock index option is exercised, the cash payment is equal to a specified dollar amount

Accepted Answer

A)  multiplied by the index level. 
B)  multiplied by the exercise price. 
C)  multiplied by the difference between the index level and the exercise price. 
D)  multiplied by the sum of the index level and the exercise price. 
A)  multiplied by the index level. 
B)  multiplied by the exercise price. 
C)  multiplied by the difference between the index level and the exercise price. 
D)  multiplied by the sum of the index level and the exercise price.

Question 11

A put option is "out of the money" when the

Accepted Answer

A)  market price of the security exceeds the exercise price. 
B)  market price of the security equals the exercise price. 
C)  market price of the security is less than the exercise price. 
D)  premium on the option is less than the exercise price. 
A)  market price of the security exceeds the exercise price. 
B)  market price of the security equals the exercise price. 
C)  market price of the security is less than the exercise price. 
D)  premium on the option is less than the exercise price.

Question 12

Speculators purchase currency ____ on currencies they expect to ____ against the dollar.

Accepted Answer

A)  call options; weaken 
B)  put options; strengthen 
C)  futures; weaken 
D)  put options; weaken 
A)  call options; weaken 
B)  put options; strengthen 
C)  futures; weaken 
D)  put options; weaken

Question 13

The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price.

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 14

The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well.

Accepted Answer

A) True 
 B)False

Question 15

Sellers (writers) of call options can offset their position at any point in time by

Accepted Answer

A)  selling a put option on the same stock. 
B)  buying identical call options. 
C)  selling additional call options on the same stock. 
D)  all of the above 
E)  A and B 
A)  selling a put option on the same stock. 
B)  buying identical call options. 
C)  selling additional call options on the same stock. 
D)  all of the above 
E)  A and B

Question 16

A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futurescontract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain?

Accepted Answer

A)  $1,968.75 
B)  $3,750.00 
C)  $3,000.00 
D)  -$2,000.00 
E)  $1,000.00 
A)  $1,968.75 
B)  $3,750.00 
C)  $3,000.00 
D)  -$2,000.00 
E)  $1,000.00

Question 17

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

Accepted Answer

A)  purchasing; put 
B)  selling; call 
C)  purchasing; call 
D)  none of the above 
A)  purchasing; put 
B)  selling; call 
C)  purchasing; call 
D)  none of the above

Question 18

The premium on an existing call option should ____ when the underlying stock price decreases.

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 19

A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator?

Accepted Answer

A)  25 percent 
B)  -25 percent 
C)  -3.2 percent 
D)  -2.9 percent 
A)  25 percent 
B)  -25 percent 
C)  -3.2 percent 
D)  -2.9 percent

Question 20

European-style stock options

Accepted Answer

A)  are long-term options (at least one year until expiration at the time they are created). 
B)  can be exercised after the expiration date. 
C)  can be exercised any time until the expiration date. 
D)  none of the above 
A)  are long-term options (at least one year until expiration at the time they are created). 
B)  can be exercised after the expiration date. 
C)  can be exercised any time until the expiration date. 
D)  none of the above

Exam 14: Options Markets

When the market price of the underlying security exceeds the exercise price, a

Which of the following is not an assumption underlying the Black-Scholes option-pricing model?

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 stock priceat which the speculator would break even?

An option with a higher exercise price has a higher call option premium and a lower put option premium.

Option trading is regulated by the

The premium on an existing call option should ____ when there is an increase in the expected short-term volatility of the stock price.

The premium on an existing put option should ____ when there is a reduction in the expected short-term volatility of the stock price.

When a stock index option is exercised, the cash payment is equal to a specified dollar amount

A put option is "out of the money" when the

Speculators purchase currency ____ on currencies they expect to ____ against the dollar.

The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price.

The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well.

Sellers (writers) of call options can offset their position at any point in time by

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

The premium on an existing call option should ____ when the underlying stock price decreases.

A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator?

European-style stock options

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

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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

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Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

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Filters

Speculators purchase currency on currencies they expect to against the dollar.

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