Question 1

Trading in "exotic options" takes place primarily

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 the options 
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 the options B

Question 2

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 the options 
E) None of the options 
A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) All of the options 
E) None of the options C

Question 3

Suppose that you purchased a call option on the S&P 100 Index.The option has an exercise price of 1,680 and the index is now at 1,720.What will happen when you exercise the option

Accepted Answer

A) You will have to pay $1,680. 
B) You will receive $1,720. 
C) You will receive $1,680. 
D) You will receive $4,000. 
E) You will have to pay $4,000. 
A) You will have to pay $1,680. 
B) You will receive $1,720. 
C) You will receive $1,680. 
D) You will receive $4,000. 
E) You will have to pay $4,000. D

Question 4

The current market price of a share of AT&T 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 AT&T stock is $40. 
D) is out of the money and sells for a higher price than if the market price of AT&T stock is $40. 
E) is in the money and sells for a higher price than if the market price of AT&T stock is $40. 
A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the market price of AT&T stock is $40. 
D) is out of the money and sells for a higher price than if the market price of AT&T stock is $40. 
E) is in the money and sells for a higher price than if the market price of AT&T stock is $40.

Question 5

All else equal, call option values are lower

Accepted Answer

A) in the month of May. 
B) for low dividend payout policies. 
C) for high dividend payout policies. 
D) in the month of May and for low dividend payout policies. 
E) in the month of May and for high dividend payout policies. 
A) in the month of May. 
B) for low dividend payout policies. 
C) for high dividend payout policies. 
D) in the month of May and for low dividend payout policies. 
E) in the month of May and for high dividend payout policies.

Question 6

The price that the writer of a put option receives to sell the option is called the

Accepted Answer

A) premium. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) strike price. 
A) premium. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) strike price.

Question 7

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 8

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 increase. 
D) sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
E) buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
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 increase. 
D) sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
E) buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

Question 9

The price that the writer of a call option receives to sell the option is called the

Accepted Answer

A) strike price. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) premium. 
A) strike price. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) premium.

Question 10

A put option on a stock is said to be at the money if

Accepted Answer

A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call. 
E) the price of the call is higher than the price of the put. 
A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call. 
E) the price of the call is higher than the price of the put.

Question 11

You purchase one JNJ 75 call option for a premium of $3.Ignoring transaction costs, the break-even price of the position is

Accepted Answer

A) $75. 
B) $72. 
C) $3. 
D) $78. 
A) $75. 
B) $72. 
C) $3. 
D) $78.

Question 12

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 13

Suppose the price of a share of Google stock is $500.An April call option on Google stock has a premium of $5 and an exercise price of $500.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

Accepted Answer

A) increases to $504. 
B) decreases to $490. 
C) increases to $506. 
D) decreases to $496. 
E) None of the options 
A) increases to $504. 
B) decreases to $490. 
C) increases to $506. 
D) decreases to $496. 
E) None of the options

Question 14

Currency-translated options have

Accepted Answer

A) only asset prices denoted in a foreign currency. 
B) only exercise prices denoted in a foreign currency. 
C) payoffs that only depend on the maximum price of the underlying asset during the life of the option. 
D) either asset or exercise prices denoted in a foreign currency. 
A) only asset prices denoted in a foreign currency. 
B) only exercise prices denoted in a foreign currency. 
C) payoffs that only depend on the maximum price of the underlying asset during the life of the option. 
D) either asset or exercise prices denoted in a foreign currency.

Question 15

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

Accepted Answer

A) $500. 
B) $300. 
C) $800. 
D) $200. 
E) None of the options 
A) $500. 
B) $300. 
C) $800. 
D) $200. 
E) None of the options

Question 16

Barrier options have payoffs that

Accepted Answer

A) have payoffs that only depend on the minimum price of the underlying asset during the life of the option. 
B) depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. 
C) are known in advance. 
D) have payoffs that only depend on the maximum price of the underlying asset during the life of the option. 
A) have payoffs that only depend on the minimum price of the underlying asset during the life of the option. 
B) depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. 
C) are known in advance. 
D) have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

Question 17

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your strategy is called

Accepted Answer

A) a short straddle. 
B) a long straddle. 
C) a horizontal straddle. 
D) a covered call. 
E) None of the options 
A) a short straddle. 
B) a long straddle. 
C) a horizontal straddle. 
D) a covered call. 
E) None of the options

Question 18

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) None of the options 
A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) None of the options

Question 19

You write one AT&T February 50 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

Accepted Answer

A) $50 
B) $55 
C) $45 
D) $40 
A) $50 
B) $55 
C) $45 
D) $40

Question 20

An option with an exercise price equal to the underlying asset's price is

Accepted Answer

A) worthless. 
B) in the money. 
C) at the money. 
D) out of the money. 
E) theoretically impossible. 
A) worthless. 
B) in the money. 
C) at the money. 
D) out of the money. 
E) theoretically impossible.

Exam 20: Options Markets: Introduction

Trading in "exotic options" takes place primarily

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

Suppose that you purchased a call option on the S&P 100 Index.The option has an exercise price of 1,680 and the index is now at 1,720.What will happen when you exercise the option

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

All else equal, call option values are lower

The price that the writer of a put option receives to sell the option is called the

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

An American put option allows the holder to

The price that the writer of a call option receives to sell the option is called the

A put option on a stock is said to be at the money if

You purchase one JNJ 75 call option for a premium of $3.Ignoring transaction costs, the break-even price of the position is

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

Suppose the price of a share of Google stock is $500.An April call option on Google stock has a premium of $5 and an exercise price of $500.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

Currency-translated options have

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

Barrier options have payoffs that

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your strategy is called

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

You write one AT&T February 50 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

An option with an exercise price equal to the underlying asset's price is

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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.