Question 1

A put 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 2

You purchased one AT&T March 50 call and sold one AT&T March 55 call.Your strategy is known as

Accepted Answer

A) a long straddle. 
B) a horizontal spread. 
C) a money spread. 
D) a short straddle. 
E) none of the above. 
A) a long straddle. 
B) a horizontal spread. 
C) a money spread. 
D) a short straddle. 
E) none of the above.

Question 3

Consider a one-year maturity call option and a one-year put option on the same stock,both with striking price $100.If the risk-free rate is 5%,the stock price is $103,and the put sells for $7.50,what should be the price of the call?

Accepted Answer

A) $17.50 
B) $15.26 
C) $10.36 
D) $12.26 
E) none of the above. 
A) $17.50 
B) $15.26 
C) $10.36 
D) $12.26 
E) none of the above.

Question 4

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) have 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. 
E) none of the above. 
A) only asset prices denoted in a foreign currency. 
B) only exercise prices denoted in a foreign currency. 
C) have 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. 
E) none of the above.

Question 5

What happens to an option if the underlying stock has a 2-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 half of what it was and the number of options held would double. 
D) The exercise price would double and the number of options held would double. 
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 half of what it was and the number of options held would double. 
D) The exercise price would double and the number of options held would double. 
E) There is no standard rule - each corporation has its own policy.

Question 6

The maximum loss a buyer of a stock call option can suffer is equal to

Accepted Answer

A) the striking price minus the stock price. 
B) the stock price minus the value of the call. 
C) the call premium. 
D) the stock price. 
E) none of the above. 
A) the striking price minus the stock price. 
B) the stock price minus the value of the call. 
C) the call premium. 
D) the stock price. 
E) none of the above.

Question 7

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.

Question 8

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) A and C. 
E) B and C. 
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) A and C. 
E) B and C.

Question 9

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 10

An American call option allows the buyer to

Accepted Answer

A) sell the underlying asset at the exercise price on or before the expiration date. 
B) buy the underlying asset at the exercise price on or before the expiration date. 
C) sell the option in the open market prior to expiration. 
D) A and C. 
E) B and C. 
A) sell the underlying asset at the exercise price on or before the expiration date. 
B) buy the underlying asset at the exercise price on or before the expiration date. 
C) sell the option in the open market prior to expiration. 
D) A and C. 
E) B and C.

Question 11

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 12

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. 
E) none of the above. 
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. 
E) none of the above.

Question 13

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. 
E) none of the above. 
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. 
E) none of the above.

Question 14

The price that the buyer of a put option pays to acquire 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 15

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 above. 
A) $4.38 
B) $5.60 
C) $6.23 
D) $12.26 
E) none of the above.

Question 16

A callable bond should be priced the same as

Accepted Answer

A) a convertible bond. 
B) a straight bond plus a put option. 
C) a straight bond plus a call option. 
D) a straight bond plus warrants. 
E) a straight bond. 
A) a convertible bond. 
B) a straight bond plus a put option. 
C) a straight bond plus a call option. 
D) a straight bond plus warrants. 
E) a straight bond.

Question 17

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

Question 18

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 
E) none of the above 
A) $3.1250 
B) $318.00 
C) $312.50 
D) $58.00 
E) none of the above

Question 19

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) B and C. 
E) A and C. 
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) B and C. 
E) A and C.

Question 20

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

Accepted Answer

A) strike price 
B) exercise price 
C) execution price 
D) A or C 
E) A or B 
A) strike price 
B) exercise price 
C) execution price 
D) A or C 
E) A or B

Exam 20: Futures, swaps, and Risk Management

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

You purchased one AT&T March 50 call and sold one AT&T March 55 call.Your strategy is known as

Consider a one-year maturity call option and a one-year put option on the same stock,both with striking price $100.If the risk-free rate is 5%,the stock price is $103,and the put sells for $7.50,what should be the price of the call?

Currency-Translated Options have

What happens to an option if the underlying stock has a 2-for-1 split?

The maximum loss a buyer of a stock call option can suffer is equal to

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

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

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

An American call option allows the buyer to

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?

Lookback options have payoffs that

Barrier Options have payoffs that

The price that the buyer of a put option pays to acquire the option is called the

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?

A callable bond should be priced the same as

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

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

An American put option allows the holder to

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

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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