Question 1

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 options are correct. 
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 options are correct.

Question 2

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. 
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.

Question 3

All else equal, call option values are higher
A. in the month of May.
B. for low dividend-payout policies.
C. for high dividend-payout policies.
D. in the month of May and for low dividend-payout policies.
E. in the month of May and for high dividend-payout policies.

Accepted Answer

A. in the month of May.
B. for low divid

Question 4

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 options. 
A)  $17.50 
B)  $15.26 
C)  $10.36 
D)  $12.26 
E)  None of the options.

Question 5

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 options are correct. 
A)  a long straddle. 
B)  a horizontal spread. 
C)  a money spread. 
D)  a short straddle. 
E)  None of the options are correct.

Question 6

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

Question 7

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)  is in the money and sells for a lower price than if the market price of JNJ stock is $50. 
E)  is out of the money and sells for a lower price than if the market price of JNJ stock is $50. 
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)  is in the money and sells for a lower price than if the market price of JNJ stock is $50. 
E)  is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

Question 8

Trading in "exotic options" takes place primarily

Accepted Answer

A)  on the New York Stock Exchange. 
B)  in the over-the-counter market. 
C)  on the American Stock Exchange. 
D)  in the primary marketplace. 
E)  None of the options. 
A)  on the New York Stock Exchange. 
B)  in the over-the-counter market. 
C)  on the American Stock Exchange. 
D)  in the primary marketplace. 
E)  None of the options.

Question 9

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 options are correct. 
A)  increases to $504. 
B)  decreases to $490. 
C)  increases to $506. 
D)  decreases to $496. 
E)  None of the options are correct.

Question 10

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

Accepted Answer

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

Question 11

Some more "traditional" assets have option-like features; some of these instruments include

Accepted Answer

A)  callable bonds. 
B)  convertible bonds. 
C)  warrants. 
D)  callable bonds and convertible bonds. 
E)  All of the options are correct. 
A)  callable bonds. 
B)  convertible bonds. 
C)  warrants. 
D)  callable bonds and convertible bonds. 
E)  All of the options are correct.

Question 12

To adjust for stock splits

Accepted Answer

A)  the exercise price of the option is reduced by the factor of the split, and the number of options held is increased by that factor. 
B)  the exercise price of the option is increased by the factor of the split, and the number of options held is reduced by that factor. 
C)  the exercise price of the option is reduced by the factor of the split, and the number of options held is reduced by that factor. 
D)  the exercise price of the option is increased by the factor of the split, and the number of options held is increased by that factor. 
A)  the exercise price of the option is reduced by the factor of the split, and the number of options held is increased by that factor. 
B)  the exercise price of the option is increased by the factor of the split, and the number of options held is reduced by that factor. 
C)  the exercise price of the option is reduced by the factor of the split, and the number of options held is reduced by that factor. 
D)  the exercise price of the option is increased by the factor of the split, and the number of options held is increased by that factor.

Question 13

A European 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 the expiration date. 
E)  potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date. 
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 the expiration date. 
E)  potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

Question 14

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

Accepted Answer

A)  $4,800 
B)  $200 
C)  $5,000 
D)  $5,200 
E)  None of the options are correct. 
A)  $4,800 
B)  $200 
C)  $5,000 
D)  $5,200 
E)  None of the options are correct.

Question 15

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)  is out of the money and sells for a higher price than if the strike price of the put option was $25. 
E)  is in the money and sells for a higher price than if the strike price of the put option was $25. 
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)  is out of the money and sells for a higher price than if the strike price of the put option was $25. 
E)  is in the money and sells for a higher price than if the strike price of the put option was $25.

Question 16

Derivative securities are also called contingent claims because

Accepted Answer

A)  their owners may choose whether or not to exercise them. 
B)  a large contingent of investors holds them. 
C)  the writers may choose whether or not to exercise them. 
D)  their payoffs depend on the prices of other assets. 
E)  contingency management is used in adding them to portfolios. 
A)  their owners may choose whether or not to exercise them. 
B)  a large contingent of investors holds them. 
C)  the writers may choose whether or not to exercise them. 
D)  their payoffs depend on the prices of other assets. 
E)  contingency management is used in adding them to portfolios.

Question 17

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?

Accepted Answer

A)  $10.00 
B)  $12.12 
C)  $16.00 
D)  $11.98 
E)  $14.13 
A)  $10.00 
B)  $12.12 
C)  $16.00 
D)  $11.98 
E)  $14.13

Question 18

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

Accepted Answer

A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  strike price or exercise price. 
E)  None of the options are correct. 
A)  strike price. 
B)  exercise price. 
C)  execution price. 
D)  strike price or exercise price. 
E)  None of the options are correct.

Question 19

The current market price of a share of Disney stock is $60. If a put option on this stock has a strike price of $65, 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 20

A call 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.

Exam 20: Options Markets: Introduction

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

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

All else equal, call option values are higher A. in the month of May. B. for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May and for high dividend-payout policies.

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?

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

An American call option allows the buyer to

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

Trading in "exotic options" takes place primarily

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

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

Some more "traditional" assets have option-like features; some of these instruments include

To adjust for stock splits

A European put option allows the holder to

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

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

Derivative securities are also called contingent claims because

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

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

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

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