Question 1

The put-call parity theorem

Accepted Answer

A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts,but not enough to earn arbitrage profits,once transaction costs are considered. 
D)  all of these. 
E)  none of these. 
A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts,but not enough to earn arbitrage profits,once transaction costs are considered. 
D)  all of these. 
E)  none of these. D

Question 2

All of the following factors affect the price of a stock option except

Accepted Answer

A)  the risk-free rate. 
B)  the riskiness of the stock. 
C)  the time to expiration. 
D)  the expected rate of return on the stock. 
E)  none of these. 
A)  the risk-free rate. 
B)  the riskiness of the stock. 
C)  the time to expiration. 
D)  the expected rate of return on the stock. 
E)  none of these. D

Question 3

Exchange-traded stock options expire

Accepted Answer

A)  On the first day of the expiration month. 
B)  On the last day of the expiration month. 
C)  On the 15th day of the expiration month. 
D)  On the first Monday of the expiration month. 
E)  On the third Friday of the expiration month. 
A)  On the first day of the expiration month. 
B)  On the last day of the expiration month. 
C)  On the 15th day of the expiration month. 
D)  On the first Monday of the expiration month. 
E)  On the third Friday of the expiration month. E

Question 4

The current market price of a share of BCE stock is $50.If a call option on this stock has a strike price of $45,the call

Accepted Answer

A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of BCE stock is $40. 
D)  a and c. 
E)  b and c. 
A)  is out of the money. 
B)  is in the money. 
C)  sells for a higher price than if the market price of BCE stock is $40. 
D)  a and c. 
E)  b and c.

Question 5

Derivative securities are also called contingent claims because

Accepted Answer

A)  their owners may choose whether or not to exercise them. 
B)  a large contingent of investors holds them. 
C)  the writers may choose whether or not to exercise them. 
D)  their payoffs depend on the prices of other assets. 
E)  contingency management is used in adding them to portfolios. 
A)  their owners may choose whether or not to exercise them. 
B)  a large contingent of investors holds them. 
C)  the writers may choose whether or not to exercise them. 
D)  their payoffs depend on the prices of other assets. 
E)  contingency management is used in adding them to portfolios.

Question 6

What happens to an option if the underlying stock has a 2-for-1 split?

Accepted Answer

A)  There is no change in either the exercise price or in the number of options held. 
B)  The exercise price will adjust through normal market movements;the number of options will remain the same. 
C)  The exercise price would become half of what it was and the number of options held would double. 
D)  The exercise price would double and the number of options held would double. 
E)  There is no standard rule-each corporation has its own policy. 
A)  There is no change in either the exercise price or in the number of options held. 
B)  The exercise price will adjust through normal market movements;the number of options will remain the same. 
C)  The exercise price would become half of what it was and the number of options held would double. 
D)  The exercise price would double and the number of options held would double. 
E)  There is no standard rule-each corporation has its own policy.

Question 7

An American put option allows the holder to

Accepted Answer

A)  buy the underlying asset at the striking price on or before the expiration date. 
B)  sell the underlying asset at the striking price on or before the expiration date. 
C)  potentially benefit from a stock price decrease with less risk than short selling the stock. 
D)  b and c. 
E)  a and c. 
A)  buy the underlying asset at the striking price on or before the expiration date. 
B)  sell the underlying asset at the striking price on or before the expiration date. 
C)  potentially benefit from a stock price decrease with less risk than short selling the stock. 
D)  b and c. 
E)  a and c.

Question 8

Currency options and currency futures options have different values because

Accepted Answer

A)  the payoff on the currency option depends on the exchange rate at maturity,while the currency futures option's payoff depends on the exchange rate futures price at maturity. 
B)  the payoff on the currency option depends on the exchange rate futures price at maturity,while the currency futures option's payoff depends on the exchange rate at maturity. 
C)  currency options are American while currency futures options are European. 
D)  currency futures options are American while currency options are European. 
E)  currency options are quoted in U.S.dollars while currency futures options are quoted in the foreign currency. 
A)  the payoff on the currency option depends on the exchange rate at maturity,while the currency futures option's payoff depends on the exchange rate futures price at maturity. 
B)  the payoff on the currency option depends on the exchange rate futures price at maturity,while the currency futures option's payoff depends on the exchange rate at maturity. 
C)  currency options are American while currency futures options are European. 
D)  currency futures options are American while currency options are European. 
E)  currency options are quoted in U.S.dollars while currency futures options are quoted in the foreign currency.

Question 9

Trading in "exotic options" takes place

Accepted Answer

A)  on the New York Stock Exchange. 
B)  in the over-the-counter market. 
C)  on the American Stock Exchange. 
D)  in the primary marketplace. 
E)  none of these. 
A)  on the New York Stock Exchange. 
B)  in the over-the-counter market. 
C)  on the American Stock Exchange. 
D)  in the primary marketplace. 
E)  none of these.

Question 10

You purchase one September 50 put contract for a put premium of $2.What is the maximum profit that you could gain from this strategy?

Accepted Answer

A)  $4,800 
B)  $200 
C)  $5,000 
D)  $5,200 
E)  None of these is correct 
A)  $4,800 
B)  $200 
C)  $5,000 
D)  $5,200 
E)  None of these is correct

Question 11

A European call option can be exercised

Accepted Answer

A)  any time in the future. 
B)  only on the expiration date. 
C)  if the price of the underlying asset declines below the exercise price. 
D)  immediately after dividends are paid. 
E)  none of these. 
A)  any time in the future. 
B)  only on the expiration date. 
C)  if the price of the underlying asset declines below the exercise price. 
D)  immediately after dividends are paid. 
E)  none of these.

Question 12

The value of a stock put option is positively related to the following factors except

Accepted Answer

A)  the time to expiration. 
B)  the striking price. 
C)  the stock price. 
D)  all of these. 
E)  none of these. 
A)  the time to expiration. 
B)  the striking price. 
C)  the stock price. 
D)  all of these. 
E)  none of these.

Question 13

Discuss the differences in writing covered and naked calls.Are risks involved in the two strategies similar or different? Explain.

Accepted Answer

Writing a covered call is selling a call

Question 14

You purchased one BCE March 50 call and sold one BCE March 55 call.Your strategy is known as

Accepted Answer

A)  a long straddle. 
B)  a horizontal spread. 
C)  a vertical spread. 
D)  a short straddle. 
E)  none of these. 
A)  a long straddle. 
B)  a horizontal spread. 
C)  a vertical spread. 
D)  a short straddle. 
E)  none of these.

Question 15

Asian options differ from American and European options in that

Accepted Answer

A)  they are only sold in Asian financial markets. 
B)  they never expire. 
C)  their payoff is based on the average price of the underlying asset. 
D)  both a and b. 
E)  both a and c. 
A)  they are only sold in Asian financial markets. 
B)  they never expire. 
C)  their payoff is based on the average price of the underlying asset. 
D)  both a and b. 
E)  both a and c.

Question 16

The potential loss for a writer of a naked call option on a stock is

Accepted Answer

A)  limited 
B)  unlimited 
C)  larger the lower the stock price. 
D)  equal to the call premium. 
E)  none of these. 
A)  limited 
B)  unlimited 
C)  larger the lower the stock price. 
D)  equal to the call premium. 
E)  none of these.

Question 17

A covered call position is equivalent to a

Accepted Answer

A)  long put. 
B)  short put. 
C)  long straddle. 
D)  vertical spread. 
E)  none of these. 
A)  long put. 
B)  short put. 
C)  long straddle. 
D)  vertical spread. 
E)  none of these.

Question 18

The Option Clearing Corporation is owned by

Accepted Answer

A)  the Bank of Canada. 
B)  the exchanges on which stock options are traded. 
C)  the provincial securities commissions. 
D)  the Federal Deposit Insurance Corporation. 
E)  none of these. 
A)  the Bank of Canada. 
B)  the exchanges on which stock options are traded. 
C)  the provincial securities commissions. 
D)  the Federal Deposit Insurance Corporation. 
E)  none of these.

Question 19

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.If,at expiration,the price of a share of IBM stock is $103,your profit would be

Accepted Answer

A)  $500. 
B)  $300. 
C)  zero. 
D)  $100. 
E)  none of these. 
A)  $500. 
B)  $300. 
C)  zero. 
D)  $100. 
E)  none of these.

Question 20

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.What is the lowest stock price at which you can break even?

Accepted Answer

A)  $101. 
B)  $102. 
C)  $103. 
D)  $104. 
E)  none of these. 
A)  $101. 
B)  $102. 
C)  $103. 
D)  $104. 
E)  none of these.

Exam 17: Futures Markets and Risk Management

The put-call parity theorem

All of the following factors affect the price of a stock option except

Exchange-traded stock options expire

The current market price of a share of BCE stock is $50.If a call option on this stock has a strike price of $45,the call

Derivative securities are also called contingent claims because

What happens to an option if the underlying stock has a 2-for-1 split?

An American put option allows the holder to

Currency options and currency futures options have different values because

Trading in "exotic options" takes place

You purchase one September 50 put contract for a put premium of $2.What is the maximum profit that you could gain from this strategy?

A European call option can be exercised

The value of a stock put option is positively related to the following factors except

Discuss the differences in writing covered and naked calls.Are risks involved in the two strategies similar or different? Explain.

You purchased one BCE March 50 call and sold one BCE March 55 call.Your strategy is known as

Asian options differ from American and European options in that

The potential loss for a writer of a naked call option on a stock is

A covered call position is equivalent to a

The Option Clearing Corporation is owned by

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.If,at expiration,the price of a share of IBM stock is $103,your profit would be

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.What is the lowest stock price at which you can break even?

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