Question 1

The current market price of a share of JNJ stock is $60.If a put option on this stock has a strike price of $55, the put

Accepted Answer

A) is in the money. 
B) is out of the money. 
C) sells for a lower price than if the market price of JNJ stock is $50. 
D) is in the money and sells for a lower price than if the market price of JNJ stock is $50. 
E) is out of the money and sells for a lower price than if the market price of JNJ stock is $50. 
A) is in the money. 
B) is out of the money. 
C) sells for a lower price than if the market price of JNJ stock is $50. 
D) is in the money and sells for a lower price than if the market price of JNJ stock is $50. 
E) is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

Question 2

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. 
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.

Question 3

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 4

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 the options 
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 the options

Question 5

All else equal, call option values are higher

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

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%.What is the price of a one-year put with strike price of $55

Accepted Answer

A) $9.00 
B) $12.89 
C) $16.00 
D) $18.72 
E) $15.60 
A) $9.00 
B) $12.89 
C) $16.00 
D) $18.72 
E) $15.60

Question 7

According to the put-call parity theorem, the value of a European put option on a nondividend 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 the options 
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 the options

Question 8

The lower bound on the market price of a convertible bond is

Accepted Answer

A) its straight bond value. 
B) its crooked bond value. 
C) its conversion value. 
D) its straight bond value and its conversion value. 
E) None of the options 
A) its straight bond value. 
B) its crooked bond value. 
C) its conversion value. 
D) its straight bond value and its conversion value. 
E) None of the options

Question 9

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 the options 
E) None of the options 
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 the options 
E) None of the options

Question 10

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

Question 11

The current market price of a share of CAT stock is $76.If a call option on this stock has a strike price of $76, 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 12

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) combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. 
E) combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call. 
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) combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. 
E) combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call.

Question 13

The current market price of a share of Disney stock is $60.If a put option on this stock has a strike price of $65, the put

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) can be exercised profitably. 
D) is out of the money and can be exercised profitably. 
E) is in the money and can be exercised profitably. 
A) is out of the money. 
B) is in the money. 
C) can be exercised profitably. 
D) is out of the money and can be exercised profitably. 
E) is in the money and can be exercised profitably.

Question 14

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

Accepted Answer

A) $65 
B) $75 
C) $5 
D) $70 
A) $65 
B) $75 
C) $5 
D) $70

Question 15

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

Accepted Answer

A) increases to $204. 
B) decreases to $190. 
C) increases to $206. 
D) decreases to $196. 
E) None of the options 
A) increases to $204. 
B) decreases to $190. 
C) increases to $206. 
D) decreases to $196. 
E) None of the options

Question 16

The following price quotations were taken from the Wall Street Journal.   The premium on one February 90 call contract is

Accepted Answer

A) $3.1250. 
B) $318.00. 
C) $312.50. 
D) $58.00. 
A) $3.1250. 
B) $318.00. 
C) $312.50. 
D) $58.00.

Question 17

What happens to an option if the underlying stock has a 3-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 one-third of what it was and the number of options held would triple. 
D) The exercise price would triple and the number of options held would triple. 
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 one-third of what it was and the number of options held would triple. 
D) The exercise price would triple and the number of options held would triple. 
E) There is no standard rule-each corporation has its own policy.

Question 18

Lookback options have payoffs that

Accepted Answer

A) depend in part on the minimum or maximum price of the underlying asset during the life of the option. 
B) only depend on the minimum price of the underlying asset during the life of the option. 
C) only depend on the maximum price of the underlying asset during the life of the option. 
D) are known in advance. 
A) depend in part on the minimum or maximum price of the underlying asset during the life of the option. 
B) only depend on the minimum price of the underlying asset during the life of the option. 
C) only depend on the maximum price of the underlying asset during the life of the option. 
D) are known in advance.

Question 19

Draw a graph that shows the payoff and profit to the holder of a call option at expiration.Draw another graph that shows the payoff to the holder of a put option at expiration.Draw a third graph that shows the payoff of a long straddle at expiration.Be sure to label the axes and all other relevant features of the graphs.

Accepted Answer

The first graph should look like Figure

Question 20

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45.If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call

Accepted Answer

A) $4.38 
B) $5.60 
C) $6.23 
D) $12.26 
E) None of the options 
A) $4.38 
B) $5.60 
C) $6.23 
D) $12.26 
E) None of the options

Exam 20: Options Markets: Introduction

The current market price of a share of JNJ stock is $60.If a put option on this stock has a strike price of $55, the put

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

Derivative securities are also called contingent claims because

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

All else equal, call option values are higher

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%.What is the price of a one-year put with strike price of $55

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

The lower bound on the market price of a convertible bond is

The put-call parity theorem

Financial engineering

The current market price of a share of CAT stock is $76.If a call option on this stock has a strike price of $76, the call

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

The current market price of a share of Disney stock is $60.If a put option on this stock has a strike price of $65, the put

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

The following price quotations were taken from the Wall Street Journal. The premium on one February 90 call contract is

What happens to an option if the underlying stock has a 3-for-1 split

Lookback options have payoffs that

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45.If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters