Question 1

A European call option allows the buyer to

Accepted Answer

A) sell the underlying asset at the exercise price on 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) buy the underlying asset at the exercise price on the expiration date. 
E) C and D. 
A) sell the underlying asset at the exercise price on 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) buy the underlying asset at the exercise price on the expiration date. 
E) C and D.

Question 2

The potential loss for a writer of a naked call option on a stock is

Accepted Answer

A) limited. 
B) unlimited. 
C) larger the lower the stock price. 
D) equal to the call premium. 
E) none of the above. 
A) limited. 
B) unlimited. 
C) larger the lower the stock price. 
D) equal to the call premium. 
E) none of the above.

Question 3

The maximum loss a buyer of a stock put 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 put 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 put premium. 
D) the stock price. 
E) none of the above.

Question 4

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 5

A put 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 6

The current market price of a share of CSCO stock is $22.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) sells for a higher price than if the strike price of the put option was $25. 
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 $25. 
D) A and C. 
E) B and C.

Question 7

The value of a stock put option is positively related to

Accepted Answer

A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) all of the above. 
E) A and B. 
A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) all of the above. 
E) A and B.

Question 8

The current market price of a share of Disney stock is $30.If a call option on this stock has a strike price of $35,the call

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 9

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy?

Accepted Answer

A) $7,000 
B) $400 
C) $7,400 
D) $6,600 
E) none of the above 
A) $7,000 
B) $400 
C) $7,400 
D) $6,600 
E) none of the above

Question 10

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 above. 
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 above.

Question 11

If,at expiration,the price of a share of IBM stock is $103,your profit would be

Accepted Answer

A) $500. 
B) $300. 
C) zero. 
D) $200. 
E) none of the above. 
A) $500. 
B) $300. 
C) zero. 
D) $200. 
E) none of the above.

Question 12

The price that the writer of a put option receives to sell the option is called the

Accepted Answer

A) premium 
B) exercise price 
C) execution price 
D) acquisition price 
E) strike price 
A) premium 
B) exercise price 
C) execution price 
D) acquisition price 
E) strike price

Question 13

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

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) A and C. 
E) B and C. 
A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) A and C. 
E) B and C.

Question 14

The value of a stock put option is positively related to the following factors except

Accepted Answer

A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) all of the above. 
E) none of the above. 
A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) all of the above. 
E) none of the above.

Question 15

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

Question 16

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) 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 17

A European put option can be exercised

Accepted Answer

A) any time in the future. 
B) only on the expiration date. 
C) if the price of the underlying asset declines below the exercise price. 
D) immediately after dividends are paid. 
E) none of the above. 
A) any time in the future. 
B) only on the expiration date. 
C) if the price of the underlying asset declines below the exercise price. 
D) immediately after dividends are paid. 
E) none of the above.

Question 18

Describe the protective put.What are the advantages of such a strategy?

Accepted Answer

A protective put consists of investing i

Question 19

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

Accepted Answer

A) $65 
B) $75 
C) $5 
D) $70 
E) none of the above 
A) $65 
B) $75 
C) $5 
D) $70 
E) none of the above

Question 20

What is the Option Clearing Corporation (OCC)and how does this organization facilitate option trading?

Accepted Answer

The OCC is the other side of e

Exam 20: Futures, swaps, and Risk Management

A European call option allows the buyer to

The potential loss for a writer of a naked call option on a stock is

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

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

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

The current market price of a share of CSCO stock is $22.If a put option on this stock has a strike price of $20,the put

The value of a stock put option is positively related to

The current market price of a share of Disney stock is $30.If a call option on this stock has a strike price of $35,the call

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy?

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

If,at expiration,the price of a share of IBM stock is $103,your profit would be

The price that the writer of a put option receives to sell the option is called the

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

The value of a stock put option is positively related to the following factors except

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

All else equal,call option values are higher

A European put option can be exercised

Describe the protective put.What are the advantages of such a strategy?

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

What is the Option Clearing Corporation (OCC)and how does this organization facilitate option trading?

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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