Question 1

Some more "traditional" assets have option-like features;some of these instruments include

Accepted Answer

A)  callable bonds. 
B)  convertible bonds. 
C)  warrants. 
D)  a and b. 
E)  a,b,and c. 
A)  callable bonds. 
B)  convertible bonds. 
C)  warrants. 
D)  a and b. 
E)  a,b,and c.

Question 2

The intrinsic value of an out-of-the-money call option is equal to

Accepted Answer

A)  the call premium. 
B)  zero. 
C)  the stock price minus the exercise price. 
D)  the striking price. 
E)  none of these. 
A)  the call premium. 
B)  zero. 
C)  the stock price minus the exercise price. 
D)  the striking price. 
E)  none of these.

Question 3

The maximum loss a buyer of a stock call option can suffer is equal to

Accepted Answer

A)  the striking price minus the stock price. 
B)  the stock price minus the value of the call. 
C)  the call premium. 
D)  the stock price. 
E)  none of these. 
A)  the striking price minus the stock price. 
B)  the stock price minus the value of the call. 
C)  the call premium. 
D)  the stock price. 
E)  none of these.

Question 4

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 680 and the index is now at 720.What will happen when you exercise the option?

Accepted Answer

A)  You will have to pay $680. 
B)  You will receive $720. 
C)  You will receive $680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000. 
A)  You will have to pay $680. 
B)  You will receive $720. 
C)  You will receive $680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000.

Question 5

ING Stock currently sells for $38.A one-year call option with strike price of $45 sells for $9,and the risk free interest rate is 4%.What is the price of a one-year put with strike price of $45?

Accepted Answer

A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.26 
A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.26

Question 6

You write one BCE February 50 put for a premium of $5.Ignoring transactions costs,what is the breakeven price of this position?

Accepted Answer

A)  $50 
B)  $55 
C)  $45 
D)  $40 
E)  none of these 
A)  $50 
B)  $55 
C)  $45 
D)  $40 
E)  none of these

Question 7

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will.

Accepted Answer

A)  increase;increase 
B)  decrease;increase 
C)  increase;decrease 
D)  decrease;decrease 
E)  cannot tell without further information 
A)  increase;increase 
B)  decrease;increase 
C)  increase;decrease 
D)  decrease;decrease 
E)  cannot tell without further information

Question 8

Before expiration,the time value of a call option is equal to

Accepted Answer

A)  zero. 
B)  the actual call price minus the intrinsic value of the call. 
C)  the intrinsic value of the call. 
D)  the actual call price plus the intrinsic value of the call. 
E)  none of these. 
A)  zero. 
B)  the actual call price minus the intrinsic value of the call. 
C)  the intrinsic value of the call. 
D)  the actual call price plus the intrinsic value of the call. 
E)  none of these.

Question 9

Suppose the price of a share of IBM stock is $100.An April call option on IBM stock has a premium of $5 and an exercise price of $100.Ignoring commissions,the holder of the call option will earn a profit if the price of the share

Accepted Answer

A)  increases to $104. 
B)  decreases to $90. 
C)  increases to $107. 
D)  decreases to $96. 
E)  none of these. 
A)  increases to $104. 
B)  decreases to $90. 
C)  increases to $107. 
D)  decreases to $96. 
E)  none of these.

Question 10

The intrinsic value of an in-the-money put option is equal to

Accepted Answer

A)  the stock price minus the exercise price. 
B)  the put premium. 
C)  zero. 
D)  the exercise price minus the stock price. 
E)  none of these. 
A)  the stock price minus the exercise price. 
B)  the put premium. 
C)  zero. 
D)  the exercise price minus the stock price. 
E)  none of these.

Question 11

Call options on RIM listed stock options are

Accepted Answer

A)  issued by RIM Corporation. 
B)  created by investors. 
C)  traded on various exchanges. 
D)  a and c. 
E)  b and c. 
A)  issued by RIM Corporation. 
B)  created by investors. 
C)  traded on various exchanges. 
D)  a and c. 
E)  b and c.

Question 12

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 700 and the index is now at 760.What will happen when you exercise the option?

Accepted Answer

A)  You will have to pay $6,000. 
B)  You will receive $6,000. 
C)  You will receive $700. 
D)  You will receive $760. 
E)  You will have to pay $7,000. 
A)  You will have to pay $6,000. 
B)  You will receive $6,000. 
C)  You will receive $700. 
D)  You will receive $760. 
E)  You will have to pay $7,000.

Question 13

You purchased one BCE March 50 put and sold one BCE April 50 put.Your strategy is known as

Accepted Answer

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

Question 14

A collar with a net outlay of approximately zero is an options strategy that

Accepted Answer

A)  combines a put and a call to lock in a price range for a security. 
B)  uses the gains from sale of a call to purchase a put. 
C)  uses the gains from sale of a put to purchase a call. 
D)  both a and b. 
E)  both a and c. 
A)  combines a put and a call to lock in a price range for a security. 
B)  uses the gains from sale of a call to purchase a put. 
C)  uses the gains from sale of a put to purchase a call. 
D)  both a and b. 
E)  both a and c.

Question 15

Financial engineering

Accepted Answer

A)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B)  primarily takes place for institutional investor. 
C)  primarily takes places for the individual investor. 
D)  a and b. 
E)  a and c. 
A)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B)  primarily takes place for institutional investor. 
C)  primarily takes places for the individual investor. 
D)  a and b. 
E)  a and c.

Question 16

According to the put-call parity theorem,the value of a European put option on a non-dividend paying stock is equal to:

Accepted Answer

A)  the call value plus the present value of the exercise price plus the stock price. 
B)  the call value plus the present value of the exercise price minus the stock price. 
C)  the present value of the stock price minus the exercise price minus the call price. 
D)  the present value of the stock price plus the exercise price minus the call price. 
E)  none of these. 
A)  the call value plus the present value of the exercise price plus the stock price. 
B)  the call value plus the present value of the exercise price minus the stock price. 
C)  the present value of the stock price minus the exercise price minus the call price. 
D)  the present value of the stock price plus the exercise price minus the call price. 
E)  none of these.

Question 17

To the option holder,put options are worth ______ when the exercise price is higher;call options are worth ______ when the exercise price is higher.

Accepted Answer

A)  more;more 
B)  more;less 
C)  less;more 
D)  less;less 
E)  It doesn't matter-they are too risky to be included in a reasonable person's portfolio. 
A)  more;more 
B)  more;less 
C)  less;more 
D)  less;less 
E)  It doesn't matter-they are too risky to be included in a reasonable person's portfolio.

Question 18

The following price quotations on TD Bank calls were taken from the Montreal Exchange website. $\begin{array}{l}
\text { Stock Price}&\text { Strike Price}&\text { February }\
69.02 &68&1.72\69.02&70&0.65\69.02&72&0.20
\end{array}$
The premium on one TD Bank 70 February call contract is

Accepted Answer

A)  $6.50 
B)  $175.00 
C)  $65.00 
D)  $650.00 
E)  none of these 
A)  $6.50 
B)  $175.00 
C)  $65.00 
D)  $650.00 
E)  none of these

Question 19

Consider a one-year maturity call option and a one-year put option on the same stock,both with striking price $100.If the risk-free rate is 5%,the stock price is $103,and the put sells for $7.50,what should be the price of the call?

Accepted Answer

A)  $7.50 
B)  $5.60 
C)  $10.36 
D)  $12.26 
E)  none of these. 
A)  $7.50 
B)  $5.60 
C)  $10.36 
D)  $12.26 
E)  none of these.

Question 20

An American call option allows the buyer to

Accepted Answer

A)  sell the underlying asset at the exercise price on or before the expiration date. 
B)  buy the underlying asset at the exercise price on or before the expiration date. 
C)  sell the option in the open market prior to expiration. 
D)  a and c. 
E)  b and c. 
A)  sell the underlying asset at the exercise price on or before the expiration date. 
B)  buy the underlying asset at the exercise price on or before the expiration date. 
C)  sell the option in the open market prior to expiration. 
D)  a and c. 
E)  b and c.

Exam 17: Futures Markets and Risk Management

Some more "traditional" assets have option-like features;some of these instruments include

The intrinsic value of an out-of-the-money call option is equal to

The maximum loss a buyer of a stock call option can suffer is equal to

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 680 and the index is now at 720.What will happen when you exercise the option?

ING Stock currently sells for $38.A one-year call option with strike price of $45 sells for $9,and the risk free interest rate is 4%.What is the price of a one-year put with strike price of $45?

You write one BCE February 50 put for a premium of $5.Ignoring transactions costs,what is the breakeven price of this position?

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will.

Before expiration,the time value of a call option is equal to

Suppose the price of a share of IBM stock is $100.An April call option on IBM stock has a premium of $5 and an exercise price of $100.Ignoring commissions,the holder of the call option will earn a profit if the price of the share

The intrinsic value of an in-the-money put option is equal to

Call options on RIM listed stock options are

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 700 and the index is now at 760.What will happen when you exercise the option?

You purchased one BCE March 50 put and sold one BCE April 50 put.Your strategy is known as

A collar with a net outlay of approximately zero is an options strategy that

Financial engineering

According to the put-call parity theorem,the value of a European put option on a non-dividend paying stock is equal to:

To the option holder,put options are worth ______ when the exercise price is higher;call options are worth ______ when the exercise price is higher.

The following price quotations on TD Bank calls were taken from the Montreal Exchange website. Stock Price Strike Price February 69.02 68 1.72 69.02 70 0.65 69.02 72 0.20 The premium on one TD Bank 70 February call contract is

Consider a one-year maturity call option and a one-year put option on the same stock,both with striking price $100.If the risk-free rate is 5%,the stock price is $103,and the put sells for $7.50,what should be the price of the call?

An American call option allows the buyer to

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To the option holder,put options are worth when the exercise price is higher;call options are worth when the exercise price is higher.