Question 1

The premium of an option is

Accepted Answer

A)  The price of the option. 
B)  The value of the right but not the obligation to undertake a purchase or sale of the underlying asset. 
C)  Is always non-negative. 
D)  All of the above. 
A)  The price of the option. 
B)  The value of the right but not the obligation to undertake a purchase or sale of the underlying asset. 
C)  Is always non-negative. 
D)  All of the above. D

Question 2

If your directional view is that stock prices are going to fall, you should

Accepted Answer

A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above are profitable strategies. 
A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above are profitable strategies. D

Question 3

A seller of a naked put option will want the value of the underlying asset to _______ and a buyer of a naked call option will want the value of the underlying asset to ______.

Accepted Answer

A)  decrease, decrease 
B)  decrease, increase 
C)  increase, decrease 
D)  increase, increase 
A)  decrease, decrease 
B)  decrease, increase 
C)  increase, decrease 
D)  increase, increase D

Question 4

Which of the following statements is TRUE?

Accepted Answer

A)  The maximum possible loss to the buyer of a call option is unlimited 
B)  The maximum possible loss to the seller of a call option is unlimited 
C)  The maximum possible loss to the buyer of a put option is unlimited 
D)  The maximum possible loss to the seller of a put option is unlimited 
A)  The maximum possible loss to the buyer of a call option is unlimited 
B)  The maximum possible loss to the seller of a call option is unlimited 
C)  The maximum possible loss to the buyer of a put option is unlimited 
D)  The maximum possible loss to the seller of a put option is unlimited

Question 5

The largest markets for derivatives based on notional outstandings are

Accepted Answer

A)  Equity derivatives. 
B)  Interest-rate derivatives. 
C)  Commodity derivatives. 
D)  Currency derivatives. 
A)  Equity derivatives. 
B)  Interest-rate derivatives. 
C)  Commodity derivatives. 
D)  Currency derivatives.

Question 6

If you expect stock volatility to rise but have no particular view of direction, then you should

Accepted Answer

A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above. 
A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above.

Question 7

You hold the following portfolio: a long position in a European call option on gold with a strike of $975 per oz, a short position in a European put option on gold with a strike of $975 per oz, and a short forward position in gold with a delivery price of $1,000 per oz. All three contracts expire in one month. The value of your position is

Accepted Answer

A)  Positive. 
B)  Negative. 
C)  Zero. 
D)  Can be positive, negative, or zero. 
A)  Positive. 
B)  Negative. 
C)  Zero. 
D)  Can be positive, negative, or zero.

Question 8

If you expect stock volatility to fall but have no particular view of direction, then you should

Accepted Answer

A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above. 
A)  Sell stock now. 
B)  Sell call options. 
C)  Buy put options. 
D)  All of the above.

Question 9

You have $100 to invest. You can invest it in one of two alternatives. The first is to invest it in a stock that is trading for $100. The second is to buy three-month 100-strike calls on the stock that are currently trading at $4 each. You expect the stock price to appreciate with a maximum price after three months of $110. What is the maximum return on investment you can generate using stock and options?

Accepted Answer

A)  10% 
B)  50% 
C)  150% 
D)  250% 
A)  10% 
B)  50% 
C)  150% 
D)  250%

Question 10

You have a long position in a stock that you purchased for $100, and a short position in a put option on the same stock at strike K = 100. At maturity the stock price is $95, and you liquidate your stock and option positions. Your gross payoff (cash flow) is

Accepted Answer

A)  $0 
B)  $5 
C)  $90 
D)  $95 
A)  $0 
B)  $5 
C)  $90 
D)  $95

Question 11

You have $100 to invest in a stock (or options on the stock). The stock is trading for $100. The three-month 100-strike calls on the stock are trading at $4 each. The minimum stock price you expect to see after three months is $60. What is the worst case return on investment you can possibly end up with using stock and/or options?

Accepted Answer

A)  -100% 
B)  -40% 
C)  0% 
D)  +6% 
A)  -100% 
B)  -40% 
C)  0% 
D)  +6%

Question 12

You have a long position in a stock that you purchased for $100, a short position in a call and a long position in a put, both at strike K = 100. At maturity the stock price is ST, and you liquidate your stock and option positions. Your gross payoff (cash flow) is

Accepted Answer

A)  0 
B)  ST.- 100 
C)  100 
D)  100 - ST 
A)  0 
B)  ST.- 100 
C)  100 
D)  100 - ST

Question 13

I hold a long position in a call option on IBM stock. If the price of IBM goes down and its volatility goes up, then the value of my call option

Accepted Answer

A)  Increases. 
B)  Decreases. 
C)  Is unaffected. 
D)  May increase, decrease, or stay the same. 
A)  Increases. 
B)  Decreases. 
C)  Is unaffected. 
D)  May increase, decrease, or stay the same.

Question 14

The writer of a put option on a stock

Accepted Answer

A)  Has the right but not the obligation to sell the stock. 
B)  Has the right but not the obligation to buy the stock. 
C)  Has the obligation but not the right to sell the stock. 
D)  Has the obligation but not the right to buy the stock. 
A)  Has the right but not the obligation to sell the stock. 
B)  Has the right but not the obligation to buy the stock. 
C)  Has the obligation but not the right to sell the stock. 
D)  Has the obligation but not the right to buy the stock.

Question 15

For a call and a put written on the same underlying but at at possibly different strike prices,

Accepted Answer

A)  Both call and put options may be in-the-money at the same time. 
B)  If the call is in-the-money, then the put will be out-of-the-money. 
C)  If one of the options is out-of-the-money, then the other one is guaranteed to be in-the-money. 
D)  At least one option will be in-the-money. 
A)  Both call and put options may be in-the-money at the same time. 
B)  If the call is in-the-money, then the put will be out-of-the-money. 
C)  If one of the options is out-of-the-money, then the other one is guaranteed to be in-the-money. 
D)  At least one option will be in-the-money.

Question 16

An investor who holds a short call option on IBM stock is implicitly

Accepted Answer

A)  Bullish on direction and bearish on volatility 
B)  Bearish on direction and bullish on volatility 
C)  Bearish on direction and volatility 
D)  Bullish on direction and volatility 
A)  Bullish on direction and bearish on volatility 
B)  Bearish on direction and bullish on volatility 
C)  Bearish on direction and volatility 
D)  Bullish on direction and volatility

Question 17

You sell an IBM call option for $4. The strike price of the option is $120, and the maturity is one year. At maturity, the price of the IBM stock is $126. Your profit/loss over the entire transaction is:

Accepted Answer

A)  $3 profit 
B)  $2 loss 
C)  $6 loss 
D)  $4 profit 
A)  $3 profit 
B)  $2 loss 
C)  $6 loss 
D)  $4 profit

Question 18

The value of the following position for options at the same strike price is always zero:

Accepted Answer

A)  A long call and a long put. 
B)  A short call and a short put. 
C)  Both (a) and (b). ( 
D)  Neither (a) nor (b). 
A)  A long call and a long put. 
B)  A short call and a short put. 
C)  Both (a) and (b). ( 
D)  Neither (a) nor (b).

Question 19

You anticipate that volatility will increase sharply and the stock price will fall. Select the most profitable of the following portfolios to hold, given your views:

Accepted Answer

A)  Long stock and long calls. 
B)  Short stock and long puts. 
C)  Long calls and short puts. 
D)  Short stock and short calls. 
A)  Long stock and long calls. 
B)  Short stock and long puts. 
C)  Long calls and short puts. 
D)  Short stock and short calls.

Question 20

A call option with a strike of K = 100 is purchased at a premium of $4. The stock price at maturity is $105. The net payoff of the option is

Accepted Answer

A)  $1 
B)  $5 
C)  $96 
D)  $101 
A)  $1 
B)  $5 
C)  $96 
D)  $101

Exam 7: Options Markets

The premium of an option is

If your directional view is that stock prices are going to fall, you should

A seller of a naked put option will want the value of the underlying asset to _______ and a buyer of a naked call option will want the value of the underlying asset to ______.

Which of the following statements is TRUE?

The largest markets for derivatives based on notional outstandings are

If you expect stock volatility to rise but have no particular view of direction, then you should

If you expect stock volatility to fall but have no particular view of direction, then you should

You have a long position in a stock that you purchased for $100, and a short position in a put option on the same stock at strike K = 100. At maturity the stock price is $95, and you liquidate your stock and option positions. Your gross payoff (cash flow) is

You have a long position in a stock that you purchased for $100, a short position in a call and a long position in a put, both at strike K = 100. At maturity the stock price is ST, and you liquidate your stock and option positions. Your gross payoff (cash flow) is

I hold a long position in a call option on IBM stock. If the price of IBM goes down and its volatility goes up, then the value of my call option

The writer of a put option on a stock

For a call and a put written on the same underlying but at at possibly different strike prices,

An investor who holds a short call option on IBM stock is implicitly

You sell an IBM call option for $4. The strike price of the option is $120, and the maturity is one year. At maturity, the price of the IBM stock is $126. Your profit/loss over the entire transaction is:

The value of the following position for options at the same strike price is always zero:

You anticipate that volatility will increase sharply and the stock price will fall. Select the most profitable of the following portfolios to hold, given your views:

A call option with a strike of K = 100 is purchased at a premium of $4. The stock price at maturity is $105. The net payoff of the option is

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise Put-Call Parity

Option Pricing: an Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Currency and Commodity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton HJM and Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters

A seller of a naked put option will want the value of the underlying asset to _ and a buyer of a naked call option will want the value of the underlying asset to .

You have a long position in a stock that you purchased for $100, a short position in a call and a long position in a put, both at strike K = 100. At maturity the stock price is S_T, and you liquidate your stock and option positions. Your gross payoff (cash flow) is