Question 1

You buy one Xerox 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 above. 
A) a short straddle. 
B) a long straddle. 
C) a horizontal straddle. 
D) a covered call. 
E) none of the above.

Question 2

Which of the following factors affect the price of a stock option

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) A,B,and C. 
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) A,B,and C.

Question 3

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

Question 4

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 the above. 
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 above.

Question 5

The current market price of a share of Boeing stock is $75.If a call option on this stock has a strike price of $70,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 Boeing stock is $70. 
D) A and C. 
E) B and C. 
A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the market price of Boeing stock is $70. 
D) A and C. 
E) B and C.

Question 6

A call option on a stock is said to be out of 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 7

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 8

The current market price of a share of a stock is $20.If a put option on this stock has a strike price of $18,the put

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the strike price of the put option was $23. 
D) A and C. 
E) B and C. 
A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the strike price of the put option was $23. 
D) A and C. 
E) B and C.

Question 9

An American put option can be exercised

Accepted Answer

A) any time on or before the expiration date. 
B) only on the expiration date. 
C) any time in the indefinite future. 
D) only after dividends are paid. 
E) none of the above. 
A) any time on or before the expiration date. 
B) only on the expiration date. 
C) any time in the indefinite future. 
D) only after dividends are paid. 
E) none of the above.

Question 10

To adjust for stock splits

Accepted Answer

A) the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor. 
B) the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor. 
C) the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor. 
D) the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor. 
E) none of the above 
A) the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor. 
B) the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor. 
C) the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor. 
D) the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor. 
E) none of the above

Question 11

The current market price of a share of CAT stock is $76.If a put option on this stock has a strike price of $80,the put

Accepted Answer

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

Question 12

The current market price of a share of MOT stock is $15.If a put option on this stock has a strike price of $20,the put

Accepted Answer

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

Question 13

You write one AT&T 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 the above 
A) $50 
B) $55 
C) $45 
D) $40 
E) none of the above

Question 14

A call option on a stock is said to be in 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 15

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 
E) none of the above 
A) $75 
B) $72 
C) $3 
D) $78 
E) none of the above

Question 16

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 17

What is the lowest stock price at which you can break even?

Accepted Answer

A) $101. 
B) $102. 
C) $103. 
D) $104. 
E) none of the above. 
A) $101. 
B) $102. 
C) $103. 
D) $104. 
E) none of the above.

Question 18

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.
-The maximum potential profit of your strategy is ________ if both options are exercised.

Accepted Answer

A) $600. 
B) $500. 
C) $200. 
D) $300. 
E) $100 
A) $600. 
B) $500. 
C) $200. 
D) $300. 
E) $100

Question 19

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 20

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70,the put

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 Boeing stock is $70. 
D) A and C. 
E) B and C. 
A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the market price of Boeing stock is $70. 
D) A and C. 
E) B and C.

Exam 20: Futures, swaps, and Risk Management

You buy one Xerox 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

Which of the following factors affect the price of a stock option

All else equal,call option values are lower

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

The current market price of a share of Boeing stock is $75.If a call option on this stock has a strike price of $70,the call

A call option on a stock is said to be out of the money if

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?

The current market price of a share of a stock is $20.If a put option on this stock has a strike price of $18,the put

An American put option can be exercised

To adjust for stock splits

The current market price of a share of CAT stock is $76.If a put option on this stock has a strike price of $80,the put

The current market price of a share of MOT stock is $15.If a put option on this stock has a strike price of $20,the put

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

A call option on a stock is said to be in 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

Derivative securities are also called contingent claims because

What is the lowest stock price at which you can break even?

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2. -The maximum potential profit of your strategy is ________ if both options are exercised.

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

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70,the put

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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