Question 1

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Accepted Answer

A)  The option will continue to gain value until its September expiration. 
B)  The owner profits $13 per share by exercising now. 
C)  Further decreases in CBA stock price will be translated directly into additional option value. 
D)  $20 is the maximum value for this option. 
A)  The option will continue to gain value until its September expiration. 
B)  The owner profits $13 per share by exercising now. 
C)  Further decreases in CBA stock price will be translated directly into additional option value. 
D)  $20 is the maximum value for this option.

Question 2

Which of the following option traders receive,rather than pay,a premium?

Accepted Answer

A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D)  Neither buyers nor sellers receive premiums 
A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D)  Neither buyers nor sellers receive premiums

Question 3

An investor who is buying a put option is expecting:

Accepted Answer

A)  stock prices to go up. 
B)  stock prices to go down. 
C)  interest rates to go up. 
D)  interest rates to go down. 
A)  stock prices to go up. 
B)  stock prices to go down. 
C)  interest rates to go up. 
D)  interest rates to go down.

Question 4

At expiration a call option will have no value if the stock price is less than exercise price.

Accepted Answer

A) True 
 B)False

Question 5

How,in general,is value derived from options on real assets?

Accepted Answer

When the flexibility is retained in capi

Question 6

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

Accepted Answer

A)  Buyer of a call option with exercise price of $65. 
B)  Buyer of a put option with exercise price of $65. 
C)  Buyer of a call option with exercise price of $80. 
D)  Buyer of a put option with exercise price of $85. 
A)  Buyer of a call option with exercise price of $65. 
B)  Buyer of a put option with exercise price of $65. 
C)  Buyer of a call option with exercise price of $80. 
D)  Buyer of a put option with exercise price of $85.

Question 7

How does the price of a put option respond to a stock price increase?

Accepted Answer

A)  Increases 
B)  Decreases 
C)  Remains the same 
D)  Goes to zero 
A)  Increases 
B)  Decreases 
C)  Remains the same 
D)  Goes to zero

Question 8

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

Accepted Answer

A)  September put; $65 exercise price 
B)  September put; $75 exercise price 
C)  December put; $65 exercise price 
D)  December put; $75 exercise price 
A)  September put; $65 exercise price 
B)  September put; $75 exercise price 
C)  December put; $65 exercise price 
D)  December put; $75 exercise price

Question 9

As a stock's market price increases,the value of its call option will increase also.

Accepted Answer

A) True 
 B)False

Question 10

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Accepted Answer

A)  Option holders pay no income taxes. 
B)  Shareholders do not have capped (restricted) profits. 
C)  Option holders do not receive dividends. 
D)  Shareholders cannot sustain losses. 
A)  Option holders pay no income taxes. 
B)  Shareholders do not have capped (restricted) profits. 
C)  Option holders do not receive dividends. 
D)  Shareholders cannot sustain losses.

Question 11

Which of the following call options would command the higher premium,other things equal?

Accepted Answer

A)  October 2015 expiration, $45 strike price 
B)  December 2015 expiration, $40 strike price 
C)  March 2016 expiration, $45 strike price 
D)  June 2016 expiration, $40 strike price 
A)  October 2015 expiration, $45 strike price 
B)  December 2015 expiration, $40 strike price 
C)  March 2016 expiration, $45 strike price 
D)  June 2016 expiration, $40 strike price

Question 12

If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share,then the:

Accepted Answer

A)  bond should trade for $900. 
B)  bond should trade for $1,000. 
C)  bond should trade for $1,100. 
D)  firm will have already converted the bond. 
A)  bond should trade for $900. 
B)  bond should trade for $1,000. 
C)  bond should trade for $1,100. 
D)  firm will have already converted the bond.

Question 13

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price,exercise price,interest rate,time to expiration,volatility of stock price.

Accepted Answer

Stock price-direct relationship; the hol

Question 14

If you feel strongly that a stock price will move,but are unsure of the direction,you could buy the stock and:

Accepted Answer

A)  buy both a put and a call. 
B)  sell both a put and a call. 
C)  buy a put and sell a call. 
D)  buy two puts. 
A)  buy both a put and a call. 
B)  sell both a put and a call. 
C)  buy a put and sell a call. 
D)  buy two puts.

Question 15

Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

Accepted Answer

A) True 
 B)False

Question 16

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Accepted Answer

A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero. 
A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero.

Question 17

Why is the value of a call option said to increase as the interest rate increases?

Accepted Answer

A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D)  Interest rate increases reduce the option premium. 
A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D)  Interest rate increases reduce the option premium.

Question 18

What are the determinants of option values?

Accepted Answer

The value of call options depends on the

Question 19

Investors who buy calls or puts have a cap on their possible losses from holding options.Specifically,they cannot lose more than the value of their premium.How does this differ for investors who sell options?

Accepted Answer

Investors who sell calls or puts have un

Question 20

A writer of a call option expects the stock price to:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  remain unchanged. 
D)  cash dividends quarterly. 
A)  decrease. 
B)  increase. 
C)  remain unchanged. 
D)  cash dividends quarterly.

Exam 25: Options

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Which of the following option traders receive,rather than pay,a premium?

An investor who is buying a put option is expecting:

At expiration a call option will have no value if the stock price is less than exercise price.

How,in general,is value derived from options on real assets?

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

How does the price of a put option respond to a stock price increase?

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

As a stock's market price increases,the value of its call option will increase also.

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Which of the following call options would command the higher premium,other things equal?

If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share,then the:

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price,exercise price,interest rate,time to expiration,volatility of stock price.

If you feel strongly that a stock price will move,but are unsure of the direction,you could buy the stock and:

Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Why is the value of a call option said to increase as the interest rate increases?

What are the determinants of option values?

Investors who buy calls or puts have a cap on their possible losses from holding options.Specifically,they cannot lose more than the value of their premium.How does this differ for investors who sell options?

A writer of a call option expects the stock price to:

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