Question 1

Options can be used to

Accepted Answer

A)  modify an equity portfolio's systematic risk. 
B)  modify an equity portfolio's unsystematic risk. 
C)  manage currency exposures in international equity portfolios. 
D)  change a portfolio's exposure to a particular asset. 
E)  All of these are correct. 
A)  modify an equity portfolio's systematic risk. 
B)  modify an equity portfolio's unsystematic risk. 
C)  manage currency exposures in international equity portfolios. 
D)  change a portfolio's exposure to a particular asset. 
E)  All of these are correct.

Question 2

In a money spread, an investor would

Accepted Answer

A)  buy two in-the-money call options on the same stock with different exercise dates. 
B)  buy two out-of-the-money call options on the same stock with different exercise dates. 
C)  sell two in-the-money call options on the same stock with different exercise dates. 
D)  sell an out-of-the-money call and purchase an in-the-money call on the same stock with the same exercise date. 
E)  sell two out-of-the-money call options on the same stock with different exercise dates. 
A)  buy two in-the-money call options on the same stock with different exercise dates. 
B)  buy two out-of-the-money call options on the same stock with different exercise dates. 
C)  sell two in-the-money call options on the same stock with different exercise dates. 
D)  sell an out-of-the-money call and purchase an in-the-money call on the same stock with the same exercise date. 
E)  sell two out-of-the-money call options on the same stock with different exercise dates.

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.1. If the spot rate at expiration is $0.75 and the put option was purchased, what is the dollar gain or loss?

Accepted Answer

A)  $0 
B)  $200 loss 
C)  $200 gain 
D)  $3160 gain 
E)  $1187 loss 
A)  $0 
B)  $200 loss 
C)  $200 gain 
D)  $3160 gain 
E)  $1187 loss

Question 4

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $106.25 gain 
B)  $106.25 loss 
C)  $1,275.00 loss 
D)  $1,275.00 gain 
E)  $75.00 loss 
A)  $106.25 gain 
B)  $106.25 loss 
C)  $1,275.00 loss 
D)  $1,275.00 gain 
E)  $75.00 loss

Question 5

All of the following are normal characteristics of a convertible bond, EXCEPT

Accepted Answer

A)  conversion at the option of the issuer. 
B)  conversion into a fixed number of shares of common stock. 
C)  a conversion price initially above the market price of the common stock. 
D)  an interest rate lower than that on straight debentures. 
E)  subordination. 
A)  conversion at the option of the issuer. 
B)  conversion into a fixed number of shares of common stock. 
C)  a conversion price initially above the market price of the common stock. 
D)  an interest rate lower than that on straight debentures. 
E)  subordination.

Question 6

A price spread (or vertical spread) involves buying and selling an option for the same stock and expiration date but with different exercise prices.

Accepted Answer

A) True 
 B)False

Question 7

In the Black-Scholes option pricing model, an increase in security price (S) will cause

Accepted Answer

A)  an increase in call value and an increase in put value. 
B)  an increase in call value and a decrease in put value. 
C)  a decrease in call value and an increase in put value. 
D)  a decrease in call value and a decrease in put value. 
E)  an increase in call value and an increase or decrease in put value. 
A)  an increase in call value and an increase in put value. 
B)  an increase in call value and a decrease in put value. 
C)  a decrease in call value and an increase in put value. 
D)  a decrease in call value and a decrease in put value. 
E)  an increase in call value and an increase or decrease in put value.

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk-free rate is 3 three over this time period, and the expected volatility is 0.35.
-Refer to Exhibit 16.3. Use the Black-Scholes option pricing model to calculate the price of a call option.

Accepted Answer

A)  $5.19 
B)  $4.35 
C)  $3.93 
D)  $6.19 
E)  $8.17 
A)  $5.19 
B)  $4.35 
C)  $3.93 
D)  $6.19 
E)  $8.17

Question 9

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
  
-Refer to Exhibit 16.4. Calculate the net value of a covered call position at a stock price at expiration of $20 and a stock price at expiration of $45.

Accepted Answer

A)  $6.35, $18.85 
B)  $29.65, $42.15 
C)  $21.65, $34.15 
D)  $8, $8 
E)  -$8, -$8 
A)  $6.35, $18.85 
B)  $29.65, $42.15 
C)  $21.65, $34.15 
D)  $8, $8 
E)  -$8, -$8

Question 10

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
  
-Refer to Exhibit 16.4. A long straddle is an appropriate strategy if

Accepted Answer

A)  an investor wishes to generate additional income. 
B)  an investor wished to insure against a decline in share values. 
C)  an investor expected share prices to be volatile. 
D)  an investor expected share prices to remain in a trading range. 
E)  an investor expected share prices to be volatile but was inclined to be bullish. 
A)  an investor wishes to generate additional income. 
B)  an investor wished to insure against a decline in share values. 
C)  an investor expected share prices to be volatile. 
D)  an investor expected share prices to remain in a trading range. 
E)  an investor expected share prices to be volatile but was inclined to be bullish.

Question 11

The creation of the CBOE led to all the following innovations in options EXCEPT

Accepted Answer

A)  the creation of a central marketplace. 
B)  the introduction of a clearing corporation. 
C)  the standardization of expiration dates. 
D)  the creation of a primary market. 
E)  the creation of a secondary market. 
A)  the creation of a central marketplace. 
B)  the introduction of a clearing corporation. 
C)  the standardization of expiration dates. 
D)  the creation of a primary market. 
E)  the creation of a secondary market.

Question 12

Credit risk in the options market is only a concern to the option seller.

Accepted Answer

A) True 
 B)False

Question 13

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $68.75 loss 
B)  $68.75 gain 
C)  $37.50 loss 
D)  $1,200.00 loss 
E)  $1,200.00 gain 
A)  $68.75 loss 
B)  $68.75 gain 
C)  $37.50 loss 
D)  $1,200.00 loss 
E)  $1,200.00 gain

Question 14

In the Black-Scholes model N(d1) represents the

Accepted Answer

A)  hedge ratio. 
B)  partial derivative of the call's value with respect to the stock price. 
C)  change in the option's value given a one dollar change in the underlying security's price. 
D)  option's delta. 
E)  All of these are correct. 
A)  hedge ratio. 
B)  partial derivative of the call's value with respect to the stock price. 
C)  change in the option's value given a one dollar change in the underlying security's price. 
D)  option's delta. 
E)  All of these are correct.

Question 15

Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $80.

Accepted Answer

A)  $81.75 
B)  $73.25 
C)  $86.75 
D)  $76.75 
E)  $85.25 
A)  $81.75 
B)  $73.25 
C)  $86.75 
D)  $76.75 
E)  $85.25

Question 16

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two-period (two six-month periods) binomial option pricing model. A stock currently trades at $60 per share, and a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15 percent or fall by 15 percent during each six-month period. The one-year risk free rate is 3 percent.
-Refer to Exhibit 16.2. Calculate the price of the call option after the stock price has already moved down in value once (Cd).

Accepted Answer

A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44 
A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44

Question 17

The common stock of BioTech Industries pays a dividend of $1 per share and has a current market price of $27 per share. The convertible bond is selling for $1100. The payback or breakeven time for the bond is

Accepted Answer

A)  1.75 years. 
B)  2.89 years. 
C)  3.20 years. 
D)  3.60 years. 
E)  4.32 years. 
A)  1.75 years. 
B)  2.89 years. 
C)  3.20 years. 
D)  3.60 years. 
E)  4.32 years.

Question 18

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a strike price of $125. The options expire in 10 days. The risk-free rate is 3 three over this time period, and the expected volatility is 0.35.
-Refer to Exhibit 16.3. Calculate the price of the put option.

Accepted Answer

A)  $1.086 
B)  $0.862 
C)  $6.234 
D)  $0.623 
E)  $2.317 
A)  $1.086 
B)  $0.862 
C)  $6.234 
D)  $0.623 
E)  $2.317

Question 19

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

Accepted Answer

A)  total return swap. 
B)  credit default swap. 
C)  collar. 
D)  forward rate agreement. 
E)  swap agreement. 
A)  total return swap. 
B)  credit default swap. 
C)  collar. 
D)  forward rate agreement. 
E)  swap agreement.

Question 20

The standardization of option contracts and the creation of the Options Clearing Corporation are two important results of the opening of the Chicago Board of Options Exchange.

Accepted Answer

A) True 
 B)False

Options can be used to

In a money spread, an investor would

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.75 and the put option was purchased, what is the dollar gain or loss?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

All of the following are normal characteristics of a convertible bond, EXCEPT

A price spread (or vertical spread) involves buying and selling an option for the same stock and expiration date but with different exercise prices.

In the Black-Scholes option pricing model, an increase in security price (S) will cause

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. Calculate the net value of a covered call position at a stock price at expiration of $20 and a stock price at expiration of $45.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. A long straddle is an appropriate strategy if

The creation of the CBOE led to all the following innovations in options EXCEPT

Credit risk in the options market is only a concern to the option seller.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

In the Black-Scholes model N(d₁) represents the

The common stock of BioTech Industries pays a dividend of $1 per share and has a current market price of $27 per share. The convertible bond is selling for $1100. The payback or breakeven time for the bond is

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

The standardization of option contracts and the creation of the Options Clearing Corporation are two important results of the opening of the Chicago Board of Options Exchange.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 16: Option Contracts

Options can be used to

In a money spread, an investor would

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.75 and the put option was purchased, what is the dollar gain or loss?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

All of the following are normal characteristics of a convertible bond, EXCEPT

A price spread (or vertical spread) involves buying and selling an option for the same stock and expiration date but with different exercise prices.

In the Black-Scholes option pricing model, an increase in security price (S) will cause

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. Calculate the net value of a covered call position at a stock price at expiration of $20 and a stock price at expiration of $45.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. A long straddle is an appropriate strategy if

The creation of the CBOE led to all the following innovations in options EXCEPT

Credit risk in the options market is only a concern to the option seller.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

In the Black-Scholes model N(d1) represents the

The common stock of BioTech Industries pays a dividend of $1 per share and has a current market price of $27 per share. The convertible bond is selling for $1100. The payback or breakeven time for the bond is

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

The standardization of option contracts and the creation of the Options Clearing Corporation are two important results of the opening of the Chicago Board of Options Exchange.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

In the Black-Scholes model N(d₁) represents the