Question 1

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

Accepted Answer

A)  limited. 
B)  unlimited. 
C)  increasing when the stock price is decreasing. 
D)  equal to the call premium. 
E)  None of the options are correct. 
A)  limited. 
B)  unlimited. 
C)  increasing when the stock price is decreasing. 
D)  equal to the call premium. 
E)  None of the options are correct.

Question 2

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM 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 3

According to the put-call parity theorem, the value of a European put option on a nondividend 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 options are correct. 
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 options are correct.

Question 4

The current market price of a share of MSI stock is $24. If a call option on this stock has a strike price of $24, the call

Accepted Answer

A)  is out of the money. 
B)  is in the money. 
C)  is at the money. 
D)  None of the options are correct. 
A)  is out of the money. 
B)  is in the money. 
C)  is at the money. 
D)  None of the options are correct.

Question 5

A covered call position is

Accepted Answer

A)  the simultaneous purchase of the call and the underlying asset. 
B)  the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C)  the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D)  the purchase of a share of stock with a simultaneous sale of a call on that stock. 
E)  the simultaneous purchase of a call and sale of a put on the same stock. 
A)  the simultaneous purchase of the call and the underlying asset. 
B)  the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C)  the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D)  the purchase of a share of stock with a simultaneous sale of a call on that stock. 
E)  the simultaneous purchase of a call and sale of a put on the same stock.

Question 6

The put-call parity theorem

Accepted Answer

A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  represents the proper relationship between put and call prices. 
B)  allows for arbitrage opportunities if violated. 
C)  may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 7

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 8

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

Accepted Answer

A)  $500. 
B)  $300. 
C)  zero. 
D)  $200. 
A)  $500. 
B)  $300. 
C)  zero. 
D)  $200.

Question 9

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 options are correct. 
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 options are correct.

Question 10

Asian options differ from American and European options in that

Accepted Answer

A)  they are only sold in Asian financial markets. 
B)  they never expire. 
C)  their payoff is based on the average price of the underlying asset. 
D)  they are only sold in Asian financial markets and they never expire. 
E)  they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset. 
A)  they are only sold in Asian financial markets. 
B)  they never expire. 
C)  their payoff is based on the average price of the underlying asset. 
D)  they are only sold in Asian financial markets and they never expire. 
E)  they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset.

Question 11

The Option Clearing Corporation is owned by

Accepted Answer

A)  the Federal Reserve System. 
B)  the exchanges on which stock options are traded. 
C)  the major U.S. banks. 
D)  the Federal Deposit Insurance Corporation. 
A)  the Federal Reserve System. 
B)  the exchanges on which stock options are traded. 
C)  the major U.S. banks. 
D)  the Federal Deposit Insurance Corporation.

Question 12

Financial engineering

Accepted Answer

A)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B)  primarily takes place for the institutional investor. 
C)  primarily takes places for the individual investor. 
D)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the . underlying security and primarily takes place for the institutional investor. 
E) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes places for the individual investor. 
A)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B)  primarily takes place for the institutional investor. 
C)  primarily takes places for the individual investor. 
D)  is the custom designing of securities or portfolios with desired patterns of exposure to the price of the . underlying security and primarily takes place for the institutional investor. 
E) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes places for the individual investor.

Question 13

The following price quotations on WFM were taken from the Wall Street Journal. $$\begin{array} { c c c } 
& \text { Strike } & \
\text { Stock Price } & \text { Price } & \text { February } \
927 / 8 & 85 & 87 / 8 \
927 / 8 & 90 & 41 / 8 \
927 / 8 & 95 & 15 / 8 \
\hline
\end{array}$$ The premium on one WFM February 85 call contract is

Accepted Answer

A)  $8.875. 
B)  $887.50. 
C)  $412.50. 
D)  $158.00. 
A)  $8.875. 
B)  $887.50. 
C)  $412.50. 
D)  $158.00.

Question 14

Call options on IBM-listed stock options are

Accepted Answer

A)  issued by IBM Corporation. 
B)  created by investors. 
C)  traded on various exchanges. 
D)  issued by IBM Corporation and traded on various exchanges. 
E)  created by investors and traded on various exchanges. 
A)  issued by IBM Corporation. 
B)  created by investors. 
C)  traded on various exchanges. 
D)  issued by IBM Corporation and traded on various exchanges. 
E)  created by investors and traded on various exchanges.

Question 15

Binary options

Accepted Answer

A)  are based on two possible outcomes- yes or no. 
B)  may make a payoff of a fixed amount if a specified event happens. 
C)  may make a payoff of a fixed amount if a specified event does not happen. 
D)  may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes- yes or no. 
E)  All of the options are correct. 
A)  are based on two possible outcomes- yes or no. 
B)  may make a payoff of a fixed amount if a specified event happens. 
C)  may make a payoff of a fixed amount if a specified event does not happen. 
D)  may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes- yes or no. 
E)  All of the options are correct.

Question 16

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. 
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.

Question 17

The following price quotations on WFM were taken from the Wall Street Journal. $$\begin{array} { c c c } 
& \text { Strike } & \
\text { Stock Price } & \text { Price } & \text { February } \
917 / 8 & 85 & 87 / 8 \
917 / 8 & 90 & 41 / 8 \
917 / 8 & 95 & 15 / 8 \
\hline
\end{array}$$ The premium on one WFM February 90 call contract is

Accepted Answer

A)  $4.1250. 
B)  $418.00. 
C)  $412.50. 
D)  $158.00. 
A)  $4.1250. 
B)  $418.00. 
C)  $412.50. 
D)  $158.00.

Question 18

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

Question 19

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 20

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 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.

Exam 20: Options Markets: Introduction

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

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

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

The current market price of a share of MSI stock is $24. If a call option on this stock has a strike price of $24, the call

A covered call position is

The put-call parity theorem

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

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

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

Asian options differ from American and European options in that

The Option Clearing Corporation is owned by

Financial engineering

The following price quotations on WFM were taken from the Wall Street Journal. Strike Stock Price Price February 927/8 85 87/8 927/8 90 41/8 927/8 95 15/8 The premium on one WFM February 85 call contract is

Call options on IBM-listed stock options are

Binary options

A European put option can be exercised

The following price quotations on WFM were taken from the Wall Street Journal. Strike Stock Price Price February 917/8 85 87/8 917/8 90 41/8 917/8 95 15/8 The premium on one WFM February 90 call contract is

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

A callable bond should be priced the same as

An American put option can be exercised

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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