Question 1

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)  The risk-free rate, riskiness of the stock, and time to expiration 
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)  The risk-free rate, riskiness of the stock, and time to expiration E

Question 2

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

Accepted Answer

A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.27 
A)  $9.00 
B)  $12.89 
C)  $16.00 
D)  $18.72 
E)  $14.27 E

Question 3

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)  sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
E)  buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
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)  sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
E)  buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. B

Question 4

An American call 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 options are correct. 
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 options are correct.

Question 5

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?

Accepted Answer

A)  You will have to pay $1,680. 
B)  You will receive $1,720. 
C)  You will receive $1,680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000. 
A)  You will have to pay $1,680. 
B)  You will receive $1,720. 
C)  You will receive $1,680. 
D)  You will receive $4,000. 
E)  You will have to pay $4,000.

Question 6

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 one-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 one-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 7

The current market price of a share of MSI 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)  is out of the money and can be exercised profitably. 
E)  is in the money and can be exercised profitably. 
A)  is out of the money. 
B)  is in the money. 
C)  can be exercised profitably. 
D)  is out of the money and can be exercised profitably. 
E)  is in the money and can be exercised profitably.

Question 8

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

Accepted Answer

A)  increases to $204. 
B)  decreases to $190. 
C)  increases to $206. 
D)  decreases to $196. 
E)  None of the options are correct. 
A)  increases to $204. 
B)  decreases to $190. 
C)  increases to $206. 
D)  decreases to $196. 
E)  None of the options are correct.

Question 9

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 options. 
A)  $4.38 
B)  $5.60 
C)  $6.23 
D)  $12.26 
E)  None of the options.

Question 10

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 11

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. Barrier options have payoffs that depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. 
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. Barrier options have payoffs that depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

Question 12

A protective put strategy is

Accepted Answer

A)  a long put plus a long position in the underlying asset. 
B)  a long put plus a long call on the same underlying asset. 
C)  a long call plus a short put on the same underlying asset. 
D)  a long put plus a short call on the same underlying asset. 
E)  None of the options are correct. 
A)  a long put plus a long position in the underlying asset. 
B)  a long put plus a long call on the same underlying asset. 
C)  a long call plus a short put on the same underlying asset. 
D)  a long put plus a short call on the same underlying asset. 
E)  None of the options are correct.

Question 13

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 14

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

Accepted Answer

A)  a vertical spread. 
B)  a straddle. 
C)  a time spread. 
D)  a collar. 
A)  a vertical spread. 
B)  a straddle. 
C)  a time spread. 
D)  a collar.

Question 15

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

Question 16

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 17

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

Question 18

The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call

Accepted Answer

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

Question 19

You purchased a call option for $3.45 17 days ago. The call has a strike price of $45, and the stock is now trading for $51. If you exercise the call today, what will be your holding-period return? If you do not exercise the call today and it expires, what will be your holding-period return?

Accepted Answer

A)  173.9%, 100% 
B)  73.9%, 100% 
C)  57.5%, 173.9% 
D)  73.9%, 57.5% 
E)  100%, 100% 
A)  173.9%, 100% 
B)  73.9%, 100% 
C)  57.5%, 173.9% 
D)  73.9%, 57.5% 
E)  100%, 100%

Question 20

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)  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. 
A)  only asset prices denoted in a foreign currency. 
B)  only exercise prices denoted in a foreign currency. 
C)  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.

Exam 20: Options Markets: Introduction

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

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

An American put option allows the holder to

An American call option can be exercised

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?

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

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

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

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

Barrier options have payoffs that

A protective put strategy is

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

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

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

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?

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 Disney stock is $60. If a call option on this stock has a strike price of $65, the call

You purchased a call option for $3.45 17 days ago. The call has a strike price of $45, and the stock is now trading for $51. If you exercise the call today, what will be your holding-period return? If you do not exercise the call today and it expires, what will be your holding-period return?

Currency-translated options have

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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