Question 1

What combination of puts and calls can simulate a long stock investment?

Accepted Answer

A) Long call and short put 
B) Long call and long put 
C) Short call and short put 
D) Short call and long put 
A) Long call and short put 
B) Long call and long put 
C) Short call and short put 
D) Short call and long put

Question 2

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

Accepted Answer

A) shorting the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price 
B) buying the underlying share, borrowing the present value of the exercise price and buying a put on the same underlying share and with the same exercise price 
C) buying the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price 
D) shorting the underlying share, lending the present value of the exercise price and buying a put on the same underlying share and with the same exercise price 
A) shorting the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price 
B) buying the underlying share, borrowing the present value of the exercise price and buying a put on the same underlying share and with the same exercise price 
C) buying the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price 
D) shorting the underlying share, lending the present value of the exercise price and buying a put on the same underlying share and with the same exercise price

Question 3

The value of a listed call option on a share is lower when ________.
I. the exercise price is higher
II. the contract approaches maturity
III. the share decreases in value
IV. a share split occurs

Accepted Answer

A) II, III and IV only 
B) I, III and IV only 
C) I, II and III only 
D) I, II, III and IV 
A) II, III and IV only 
B) I, III and IV only 
C) I, II and III only 
D) I, II, III and IV

Question 4

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Accepted Answer

A) Writing an uncovered call option 
B) Writing an uncovered put option 
C) Buying a call option 
D) Buying a put option 
A) Writing an uncovered call option 
B) Writing an uncovered put option 
C) Buying a call option 
D) Buying a put option

Question 5

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will ________ and the value of Investor B's position will ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 6

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of ________ and a time value of ________.

Accepted Answer

A) $6.50; $0 
B) $5.00; $1.50 
C) $1.50; $5.00 
D) $0; $6.50 
A) $6.50; $0 
B) $5.00; $1.50 
C) $1.50; $5.00 
D) $0; $6.50

Question 7

Advantages of exchange traded options over OTC options include all but which one of the following?

Accepted Answer

A) Ease and low cost of trading 
B) Anonymity of participants 
C) Contracts that are tailored to meet the needs of market participants 
D) No concerns about counterparty credit risk 
A) Ease and low cost of trading 
B) Anonymity of participants 
C) Contracts that are tailored to meet the needs of market participants 
D) No concerns about counterparty credit risk

Question 8

An American put option gives its holder the right to ________.

Accepted Answer

A) buy the underlying asset at the exercise price on or before the expiration date 
B) buy the underlying asset at the exercise price only at the expiration date 
C) sell the underlying asset at the exercise price on or before the expiration date 
D) sell the underlying asset at the exercise price only at the expiration date 
A) buy the underlying asset at the exercise price on or before the expiration date 
B) buy the underlying asset at the exercise price only at the expiration date 
C) sell the underlying asset at the exercise price on or before the expiration date 
D) sell the underlying asset at the exercise price only at the expiration date

Question 9

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the share price is ________ in August.

Accepted Answer

A) either lower than $44.25 or higher than $55.75 
B) between $44.25 and $55.75 
C) higher than $55.75 
D) lower than $44.25 
A) either lower than $44.25 or higher than $55.75 
B) between $44.25 and $55.75 
C) higher than $55.75 
D) lower than $44.25

Question 10

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM shares sell for $123 per share. You will realise a ________ on the investment.

Accepted Answer

A) $200 profit 
B) $200 loss 
C) $300 profit 
D) $300 loss 
A) $200 profit 
B) $200 loss 
C) $300 profit 
D) $300 loss

Question 11

You own $75 000 worth of stock and you are worried the price may fall by year end in 6 months. You are considering either using puts or calls to hedge this position. Given this, which of the following statements is/are correct?
i. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls.
III. If major share price declines are likely the hedging with puts is probably better than hedging with short calls.

Accepted Answer

A) I only 
B) II only 
C) I and III only 
D) I, II and III 
A) I only 
B) II only 
C) I and III only 
D) I, II and III

Question 12

Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

Accepted Answer

A) $200 
B) $300 
C) $700 
D) $400 
A) $200 
B) $300 
C) $700 
D) $400

Question 13

You purchase a call option on a share. The profit at contract maturity of the option position is ________ where X equals the option's strike price, ST is the share price at contract expiration and C0 is the original purchase price of the option.

Accepted Answer

A) Max(-C0, ST - X - C0) 
B) Min(-C0, ST - X - C0) 
C) Max(C0, ST - X + C0) 
D) Max(0, ST - X - C0) 
A) Max(-C0, ST - X - C0) 
B) Min(-C0, ST - X - C0) 
C) Max(C0, ST - X + C0) 
D) Max(0, ST - X - C0)

Question 14

Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model.
I. early exercise
II. changing expected returns of the share
III. time varying share price volatility

Accepted Answer

A) II only 
B) I and III only 
C) II and III only 
D) I, II and III 
A) II only 
B) I and III only 
C) II and III only 
D) I, II and III

Question 15

If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

Accepted Answer

A) purchasing out-of-the-money call options 
B) purchasing at-the-money bull spreads 
C) purchasing in-the-money call options 
D) purchasing at-the-money call options 
A) purchasing out-of-the-money call options 
B) purchasing at-the-money bull spreads 
C) purchasing in-the-money call options 
D) purchasing at-the-money call options

Question 16

A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

Accepted Answer

A) at the money 
B) in the money 
C) out of the money 
D) knocked out 
A) at the money 
B) in the money 
C) out of the money 
D) knocked out

Question 17

The Black-Scholes hedge ratio for a long call option is equal to ________.

Accepted Answer

A) N(d1) 
B) N(d2) 
C) N(d1) - 1 
D) N(d2) - 1 
A) N(d1) 
B) N(d2) 
C) N(d1) - 1 
D) N(d2) - 1

Question 18

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Accepted Answer

A) time spread 
B) long straddle 
C) short straddle 
D) money spread 
A) time spread 
B) long straddle 
C) short straddle 
D) money spread

Question 19

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

Accepted Answer

A) price of the underlying asset 
B) risk-free rate of interest 
C) time to expiration 
D) variance of the underlying asset return 
A) price of the underlying asset 
B) risk-free rate of interest 
C) time to expiration 
D) variance of the underlying asset return

Question 20

A European put option gives its holder the right to ________.

Accepted Answer

A) buy the underlying asset at the exercise price on or before the expiration date 
B) buy the underlying asset at the exercise price only at the expiration date 
C) sell the underlying asset at the exercise price on or before the expiration date 
D) sell the underlying asset at the exercise price only at the expiration date 
A) buy the underlying asset at the exercise price on or before the expiration date 
B) buy the underlying asset at the exercise price only at the expiration date 
C) sell the underlying asset at the exercise price on or before the expiration date 
D) sell the underlying asset at the exercise price only at the expiration date

What combination of puts and calls can simulate a long stock investment?

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

The value of a listed call option on a share is lower when ________. I. the exercise price is higher II. the contract approaches maturity III. the share decreases in value IV. a share split occurs

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will and the value of Investor B's position will .

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of and a time value of .

Advantages of exchange traded options over OTC options include all but which one of the following?

An American put option gives its holder the right to ________.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the share price is ________ in August.

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM shares sell for $123 per share. You will realise a ________ on the investment.

Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

You purchase a call option on a share. The profit at contract maturity of the option position is ________ where X equals the option's strike price, ST is the share price at contract expiration and C0 is the original purchase price of the option.

Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I. early exercise II. changing expected returns of the share III. time varying share price volatility

If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

The Black-Scholes hedge ratio for a long call option is equal to ________.

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

A European put option gives its holder the right to ________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Managed Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis and Behavioral Finance

Bond Prices and Yields

Managing Bond Portfolios

Equity Valuation

Macroeconomic and Industry Analysis

Financial Statement Analysis

Futures and Risk Management

Investors and the Investment Process

Hedge Funds

Portfolio Performance Evaluation

Filters

Exam 14: Options and Risk Management

What combination of puts and calls can simulate a long stock investment?

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

The value of a listed call option on a share is lower when ________. I. the exercise price is higher II. the contract approaches maturity III. the share decreases in value IV. a share split occurs

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will ________ and the value of Investor B's position will ________.

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of ________ and a time value of ________.

Advantages of exchange traded options over OTC options include all but which one of the following?

An American put option gives its holder the right to ________.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the share price is ________ in August.

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM shares sell for $123 per share. You will realise a ________ on the investment.

Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

You purchase a call option on a share. The profit at contract maturity of the option position is ________ where X equals the option's strike price, ST is the share price at contract expiration and C0 is the original purchase price of the option.

Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I. early exercise II. changing expected returns of the share III. time varying share price volatility

If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

The Black-Scholes hedge ratio for a long call option is equal to ________.

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

A European put option gives its holder the right to ________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Managed Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis and Behavioral Finance

Bond Prices and Yields

Managing Bond Portfolios

Equity Valuation

Macroeconomic and Industry Analysis

Financial Statement Analysis

Futures and Risk Management

Investors and the Investment Process

Hedge Funds

Portfolio Performance Evaluation

Filters

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will and the value of Investor B's position will .

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of and a time value of .