Question 1

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 2

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to

Accepted Answer

A)  $52. 
B)  $60. 
C)  $68. 
D)  either $52 or $68. 
E)  None of the options are correct. 
A)  $52. 
B)  $60. 
C)  $68. 
D)  either $52 or $68. 
E)  None of the options are correct.

Question 3

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

Accepted Answer

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

Question 4

The price that the buyer of a put option receives 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 5

A European call 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 6

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,700, and the index is now at 1,760. What will happen when you exercise the option?

Accepted Answer

A)  You will have to pay $6,000. 
B)  You will receive $6,000. 
C)  You will receive $1,700. 
D)  You will receive $1,760. 
E)  You will have to pay $7,000. 
A)  You will have to pay $6,000. 
B)  You will receive $6,000. 
C)  You will receive $1,700. 
D)  You will receive $1,760. 
E)  You will have to pay $7,000.

Question 7

The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, 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

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. 
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.

Question 9

The lower bound on the market price of a convertible bond is

Accepted Answer

A)  its straight-bond value. 
B)  its crooked-bond value. 
C)  its conversion value. 
D)  its straight-bond value and its conversion value. 
E)  None of the options are correct. 
A)  its straight-bond value. 
B)  its crooked-bond value. 
C)  its conversion value. 
D)  its straight-bond value and its conversion value. 
E)  None of the options are correct.

Question 10

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 11

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

Accepted Answer

A)  $500. 
B)  $300. 
C)  $800. 
D)  $200. 
E)  None of the options are correct. 
A)  $500. 
B)  $300. 
C)  $800. 
D)  $200. 
E)  None of the options are correct.

Question 12

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 options are correct. 
E)  None of the options are correct. 
A)  the time to expiration. 
B)  the striking price. 
C)  the stock price. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 13

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

Accepted Answer

A)  $65 
B)  $75 
C)  $5 
D)  $70 
A)  $65 
B)  $75 
C)  $5 
D)  $70

Question 14

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 15

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is

Accepted Answer

A)  $194. 
B)  $228. 
C)  $206. 
D)  $211. 
A)  $194. 
B)  $228. 
C)  $206. 
D)  $211.

Question 16

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)  sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date. 
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)  sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

Question 17

You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?

Accepted Answer

A)  $20,000 
B)  $20,600 
C)  $19,400 
D)  $19,000 
A)  $20,000 
B)  $20,600 
C)  $19,400 
D)  $19,000

Question 18

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 19

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, 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 20

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)  combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. 
E)  combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call. 
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)  combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. 
E)  combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call.

Exam 20: Options Markets: Introduction

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

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to

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

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

A European 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 1,700, and the index is now at 1,760. What will happen when you exercise the option?

The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, the put

Lookback options have payoffs that

The lower bound on the market price of a convertible bond is

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

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

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

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

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

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is

A European call option allows the buyer to

You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?

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 CAT stock is $76. If a call option on this stock has a strike price of $76, the call

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

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