Question 1

Which of the following statements best reflects the following profit profile of an option contract?

Accepted Answer

A)  The profile depicts the short call position of the option seller. 
B)  The profile depicts the long call position of the buyer of the option. 
C)  The profile depicts the short put position of the option seller. 
D)  The profile depicts the long put position of the buyer of the option. 
A)  The profile depicts the short call position of the option seller. 
B)  The profile depicts the long call position of the buyer of the option. 
C)  The profile depicts the short put position of the option seller. 
D)  The profile depicts the long put position of the buyer of the option.

Question 2

In the options markets a put option is said to be out-of-the money if the:

Accepted Answer

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

Question 3

The strategy whereby a company buys an interest rate option that puts a maximum level on the interest rate for its borrowing is a:

Accepted Answer

A)  limit option. 
B)  cap option. 
C)  boundary option. 
D)  ceiling option. 
A)  limit option. 
B)  cap option. 
C)  boundary option. 
D)  ceiling option.

Question 4

The decision between selecting a future or an option:

Accepted Answer

A)  reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
B)  reflects the greater risk of using options and the extra insurance benefits that options provide. 
C)  reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D)  depends on whether the underlying instrument is an equity or debt instrument. 
A)  reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
B)  reflects the greater risk of using options and the extra insurance benefits that options provide. 
C)  reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D)  depends on whether the underlying instrument is an equity or debt instrument.

Question 5

An options contract:

Accepted Answer

A)  is another name for a forward contract. 
B)  gives the right to buy or sell an underlying asset at a predetermined price by a specified time. 
C)  may be written for debt securities but not equities. 
D)  may be written for equities but not debt securities. 
A)  is another name for a forward contract. 
B)  gives the right to buy or sell an underlying asset at a predetermined price by a specified time. 
C)  may be written for debt securities but not equities. 
D)  may be written for equities but not debt securities.

Question 6

If a buyer of a particular share purchased a call option on it at a strike price of $15 and the share is selling for $12 on the expiration date,the call option is worth $0.

Accepted Answer

A) True 
 B)False

Question 7

In the options market the option that gives the buyer the right to sell the specified commodity or financial instrument is:

Accepted Answer

A)  call option. 
B)  put option. 
C)  American option. 
D)  Asian option. 
A)  call option. 
B)  put option. 
C)  American option. 
D)  Asian option.

Question 8

Discuss briefly the two common option contracts for shares and options on futures contracts that are available through the AASX Trade 24.

Accepted Answer

The Australian Securities Exchange (ASX)

Question 9

A put option gives the owner the obligation to sell the underlying security.

Accepted Answer

A) True 
 B)False

Question 10

When we contrast futures with options contracts,we can say that:

Accepted Answer

A)  in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract the buyer and writer have symmetric rights. 
B)  in a futures contract the buyer and seller have symmetric rights, whereas in an options contract the buyer and writer have asymmetric rights. 
C)  for both futures contracts and options contracts the buyer and writer have symmetric rights. 
D)  for both futures contracts and options contracts the buyer and writer have asymmetric rights. 
A)  in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract the buyer and writer have symmetric rights. 
B)  in a futures contract the buyer and seller have symmetric rights, whereas in an options contract the buyer and writer have asymmetric rights. 
C)  for both futures contracts and options contracts the buyer and writer have symmetric rights. 
D)  for both futures contracts and options contracts the buyer and writer have asymmetric rights.

Question 11

In options markets,options that give the option buyer the right to exercise the option only on the maturity date are:

Accepted Answer

A)  call options. 
B)  put options. 
C)  European-type options. 
D)  American-type options. 
A)  call options. 
B)  put options. 
C)  European-type options. 
D)  American-type options.

Question 12

An investor holds long call options that may be exercised at any time over the next month.The spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the premium paid was $2.35.What is the value of the option to the holder?

Accepted Answer

A)  -$2.35 
B)  zero 
C)  $10.40 
D)  $15.10 
A)  -$2.35 
B)  zero 
C)  $10.40 
D)  $15.10

Question 13

What type of option will an option buyer purchase if they believe a share price will rise?

Accepted Answer

A)  Call 
B)  Put 
C)  Warrant 
D)  Swaption 
A)  Call 
B)  Put 
C)  Warrant 
D)  Swaption

Question 14

In relation to options when interest rates decrease,the:

Accepted Answer

A)  price of call options generally increases. 
B)  price of the underlying share usually decreases. 
C)  price of put options generally increases. 
D)  volatility of the underlying asset falls. 
A)  price of call options generally increases. 
B)  price of the underlying share usually decreases. 
C)  price of put options generally increases. 
D)  volatility of the underlying asset falls.

Question 15

In the options markets for a call option,the:

Accepted Answer

A)  buyer is committed to receive the underlying asset at a specified time. 
B)  seller is committed to handing over the specified asset at a specified time. 
C)  seller may choose whether or not to deliver the underlying asset at a specified time. 
D)  buyer will choose to exercise the option only if the price of the underlying asset falls. 
A)  buyer is committed to receive the underlying asset at a specified time. 
B)  seller is committed to handing over the specified asset at a specified time. 
C)  seller may choose whether or not to deliver the underlying asset at a specified time. 
D)  buyer will choose to exercise the option only if the price of the underlying asset falls.

Question 16

The option that is a highly leveraged option on individual stocks,with an exercise price of between one and ten cents,traded on the ASX Trade,with a European-type expiry,is a:

Accepted Answer

A)  strip. 
B)  warrant. 
C)  barrier option. 
D)  LEPO. 
A)  strip. 
B)  warrant. 
C)  barrier option. 
D)  LEPO.

Question 17

Options are contracts that give the purchaser the obligation to buy or sell an underlying asset.

Accepted Answer

A) True 
 B)False

Question 18

A lender,concerned that its cost of funds might rise during the term of a loan it has made,can hedge this rise without forgoing the chance to profit by a decline in the cost of funds.This is done by:

Accepted Answer

A)  selling futures contracts on Treasury bills. 
B)  buying futures contracts on Treasury bills. 
C)  buying call options on Treasury bills. 
D)  buying put options on Treasury bills. 
A)  selling futures contracts on Treasury bills. 
B)  buying futures contracts on Treasury bills. 
C)  buying call options on Treasury bills. 
D)  buying put options on Treasury bills.

Question 19

In option markets the price specified in the option contracts for calls and puts is called the:

Accepted Answer

A)  market price. 
B)  option price. 
C)  strike price. 
D)  expected value. 
A)  market price. 
B)  option price. 
C)  strike price. 
D)  expected value.

Question 20

What type of option will an option buyer buy if they believe a share price will fall?

Accepted Answer

A)  Call 
B)  Put 
C)  Warrant 
D)  Swaption 
A)  Call 
B)  Put 
C)  Warrant 
D)  Swaption

Exam 20: Options

Which of the following statements best reflects the following profit profile of an option contract?

In the options markets a put option is said to be out-of-the money if the:

The strategy whereby a company buys an interest rate option that puts a maximum level on the interest rate for its borrowing is a:

The decision between selecting a future or an option:

An options contract:

If a buyer of a particular share purchased a call option on it at a strike price of $15 and the share is selling for $12 on the expiration date,the call option is worth $0.

In the options market the option that gives the buyer the right to sell the specified commodity or financial instrument is:

Discuss briefly the two common option contracts for shares and options on futures contracts that are available through the AASX Trade 24.

A put option gives the owner the obligation to sell the underlying security.

When we contrast futures with options contracts,we can say that:

In options markets,options that give the option buyer the right to exercise the option only on the maturity date are:

An investor holds long call options that may be exercised at any time over the next month.The spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the premium paid was $2.35.What is the value of the option to the holder?

What type of option will an option buyer purchase if they believe a share price will rise?

In relation to options when interest rates decrease,the:

In the options markets for a call option,the:

The option that is a highly leveraged option on individual stocks,with an exercise price of between one and ten cents,traded on the ASX Trade,with a European-type expiry,is a:

Options are contracts that give the purchaser the obligation to buy or sell an underlying asset.

A lender,concerned that its cost of funds might rise during the term of a loan it has made,can hedge this rise without forgoing the chance to profit by a decline in the cost of funds.This is done by:

In option markets the price specified in the option contracts for calls and puts is called the:

What type of option will an option buyer buy if they believe a share price will fall?

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Interest Rate Risk

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

Foreign Exchange: Risk Identification and Management

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

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