Question 1

A "bet" option is also called a ____ option.

Accepted Answer

A)  barrier 
B)  lookback 
C)  digital 
D)  foreign exchange 
A)  barrier 
B)  lookback 
C)  digital 
D)  foreign exchange C

Question 2

You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months.You are considering either using puts or calls to hedge this position.Given this,which of the following statements is/are correct?
I.One way to hedge your position would be to buy puts.
II.One way to hedge your position would be to write calls.
III.If major stock price declines are likely the hedging with puts is probably better than hedging with short calls.

Accepted Answer

A)  I only 
B)  II only 
C)  I and III only 
D)  I, II and III 
A)  I only 
B)  II only 
C)  I and III only 
D)  I, II and III D

Question 3

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:  
-To establish a bull money spread with puts you would _______________.

Accepted Answer

A)  sell the 55 put and buy the 45 put 
B)  buy the 45 put and buy the 55 put 
C)  buy the 55 put and sell the 45 put 
D)  sell the 45 put and sell the 55 put 
A)  sell the 55 put and buy the 45 put 
B)  buy the 45 put and buy the 55 put 
C)  buy the 55 put and sell the 45 put 
D)  sell the 45 put and sell the 55 put A

Question 4

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:  
-Ignoring commissions,the cost to establish the bull money spread with calls would be _______.

Accepted Answer

A)  $1,050 
B)  $650 
C)  $400 
D)  $400 income rather than cost 
A)  $1,050 
B)  $650 
C)  $400 
D)  $400 income rather than cost

Question 5

The value of a listed call option on a stock is lower when _______________.
I.the exercise price is higher
II.the contract approaches maturity
III.the stock decreases in value
IV.a stock split occurs

Accepted Answer

A)  II, III and IV only 
B)  I, III and IV only 
C)  I, II and III only 
D)  I, II, III and IV 
A)  II, III and IV only 
B)  I, III and IV only 
C)  I, II and III only 
D)  I, II, III and IV

Question 6

In 1973,trading of standardized options on a national exchange started on the _________.

Accepted Answer

A)  AMEX 
B)  CBOE 
C)  NYSE 
D)  CFTC 
A)  AMEX 
B)  CBOE 
C)  NYSE 
D)  CFTC

Question 7

A European call option gives the buyer the right to _________.

Accepted Answer

A)  buy the underlying asset at the exercise price on or before the expiration date 
B)  buy the underlying asset at the exercise price only at the expiration date 
C)  sell the underlying asset at the exercise price on or before the expiration date 
D)  sell the underlying asset at the exercise price only at the expiration date 
A)  buy the underlying asset at the exercise price on or before the expiration date 
B)  buy the underlying asset at the exercise price only at the expiration date 
C)  sell the underlying asset at the exercise price on or before the expiration date 
D)  sell the underlying asset at the exercise price only at the expiration date

Question 8

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option.

Accepted Answer

A)  American 
B)  European 
C)  Asian 
D)  Australian 
A)  American 
B)  European 
C)  Asian 
D)  Australian

Question 9

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
-Selling a straddle would generate total premium income of _____.

Accepted Answer

A)  $300 
B)  $400 
C)  $500 
D)  $700 
A)  $300 
B)  $400 
C)  $500 
D)  $700

Question 10

A quanto provides its holder with ______________.

Accepted Answer

A)  the right to participate in the payoffs from a portfolio of gambling casino stocks 
B)  the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate 
C)  the right to participate in the investment performance of a foreign security 
D)  the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate 
A)  the right to participate in the payoffs from a portfolio of gambling casino stocks 
B)  the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate 
C)  the right to participate in the investment performance of a foreign security 
D)  the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

Question 11

Advantages of exchange traded options over OTC options include all but which one of the following?

Accepted Answer

A)  Ease and low cost of trading 
B)  Anonymity of participants 
C)  Contracts that are tailored to meet the needs of market participants 
D)  No concerns about counterparty credit risk 
A)  Ease and low cost of trading 
B)  Anonymity of participants 
C)  Contracts that are tailored to meet the needs of market participants 
D)  No concerns about counterparty credit risk

Question 12

Which of the following strategies makes a profit if the stock price stays stable?

Accepted Answer

A)  Long call and short put 
B)  Long call and long put 
C)  Short call and short put 
D)  Short call and long put 
A)  Long call and short put 
B)  Long call and long put 
C)  Short call and short put 
D)  Short call and long put

Question 13

A lookback option provides its holder with _______________.

Accepted Answer

A)  a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option 
B)  a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the option 
C)  a payoff if the firm's stock price falls below some specified dollar amount during the term of the option 
D)  a payoff based on the average price of the underlying stock over the life of the option 
A)  a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option 
B)  a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the option 
C)  a payoff if the firm's stock price falls below some specified dollar amount during the term of the option 
D)  a payoff based on the average price of the underlying stock over the life of the option

Question 14

At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.

Accepted Answer

A)  Max(0, ST - X) 
B)  Min(0, ST - X) 
C)  Max(0, X - ST) 
D)  Min(0, X - ST) 
A)  Max(0, ST - X) 
B)  Min(0, ST - X) 
C)  Max(0, X - ST) 
D)  Min(0, X - ST)

Question 15

Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock and Bond B is not.Bond A is priced at $1,245 and Bond B is priced at $1,120.Bond A has a promised yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%.The stock of Bond A is trading at $49.80 per share.Which of the following statements is/are correct?
I.The value of the conversion option for Bond A is $125.
II.The lower promised yield to maturity of Bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III.Bond A can be converted into 25 shares of stock.

Accepted Answer

A)  II only 
B)  I and III only 
C)  III only 
D)  I, II and III 
A)  II only 
B)  I and III only 
C)  III only 
D)  I, II and III

Question 16

A covered call strategy benefits from what environment?

Accepted Answer

A)  Falling interest rates 
B)  Price stability 
C)  Price volatility 
D)  Unexpected events 
A)  Falling interest rates 
B)  Price stability 
C)  Price volatility 
D)  Unexpected events

Question 17

A convertible bond is deep in the money.This means the bond price will closely track the __________.

Accepted Answer

A)  straight debt value of the bond 
B)  conversion value of the bond 
C)  straight debt value of the bond minus the conversion value 
D)  straight debt value of the bond plus the conversion value 
A)  straight debt value of the bond 
B)  conversion value of the bond 
C)  straight debt value of the bond minus the conversion value 
D)  straight debt value of the bond plus the conversion value

Question 18

You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Accepted Answer

A)  $200 profit 
B)  $200 loss 
C)  $300 profit 
D)  $300 loss 
A)  $200 profit 
B)  $200 loss 
C)  $300 profit 
D)  $300 loss

Question 19

Which one of the following is a correct statement?

Accepted Answer

A)  Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. 
B)  A convertible bond consists of a straight bond plus a specified number of detachable warrants. 
C)  Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year. 
D)  Call options may be convertible into the stock while warrants are not convertible into the stock. 
A)  Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. 
B)  A convertible bond consists of a straight bond plus a specified number of detachable warrants. 
C)  Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year. 
D)  Call options may be convertible into the stock while warrants are not convertible into the stock.

Question 20

The maximum loss a buyer of a stock call option can suffer is the _________.

Accepted Answer

A)  call premium 
B)  stock price 
C)  stock price minus the value of the call 
D)  strike price minus the stock price 
A)  call premium 
B)  stock price 
C)  stock price minus the value of the call 
D)  strike price minus the stock price

A "bet" option is also called a ____ option.

The value of a listed call option on a stock is lower when _______________. I.the exercise price is higher II.the contract approaches maturity III.the stock decreases in value IV.a stock split occurs

In 1973,trading of standardized options on a national exchange started on the _________.

A European call option gives the buyer the right to _________.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option.

A quanto provides its holder with ______________.

Advantages of exchange traded options over OTC options include all but which one of the following?

Which of the following strategies makes a profit if the stock price stays stable?

A lookback option provides its holder with _______________.

At contract maturity the value of a call option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.

A covered call strategy benefits from what environment?

A convertible bond is deep in the money.This means the bond price will closely track the __________.

You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Which one of the following is a correct statement?

The maximum loss a buyer of a stock call option can suffer is the _________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Exam 15: Options Markets

A "bet" option is also called a ____ option.

The value of a listed call option on a stock is lower when _______________. I.the exercise price is higher II.the contract approaches maturity III.the stock decreases in value IV.a stock split occurs

In 1973,trading of standardized options on a national exchange started on the _________.

A European call option gives the buyer the right to _________.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option.

A quanto provides its holder with ______________.

Advantages of exchange traded options over OTC options include all but which one of the following?

Which of the following strategies makes a profit if the stock price stays stable?

A lookback option provides its holder with _______________.

At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.

A covered call strategy benefits from what environment?

A convertible bond is deep in the money.This means the bond price will closely track the __________.

You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Which one of the following is a correct statement?

The maximum loss a buyer of a stock call option can suffer is the _________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

At contract maturity the value of a call option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.