Question 1

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 2

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________.

Accepted Answer

A)  at the money 
B)  in the money 
C)  out of the money 
D)  knocked in 
A)  at the money 
B)  in the money 
C)  out of the money 
D)  knocked in

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:
 
If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

Accepted Answer

A)  $300 
B)  −$400 
C)  $150 
D)  $50 
A)  $300 
B)  −$400 
C)  $150 
D)  $50

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

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________.

Accepted Answer

A)  time spread 
B)  long straddle 
C)  short straddle 
D)  money spread 
A)  time spread 
B)  long straddle 
C)  short straddle 
D)  money spread

Question 6

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 3 months. The price of a 3-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 7

A writer of a call option will want the value of the underlying asset to ________, and a buyer of a put 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

Question 8

Why is the holder of an option not required to post margin under the Option Clearing Corporation rules?

Accepted Answer

A)  Once an option is purchased, no further money is at risk. 
B)  The seller pays all costs. 
C)  The credit worthiness of the holder covers all potential losses. 
D)  The holder must post securities instead of margin. 
A)  Once an option is purchased, no further money is at risk. 
B)  The seller pays all costs. 
C)  The credit worthiness of the holder covers all potential losses. 
D)  The holder must post securities instead of margin.

Question 9

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

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 10

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is ________.

Accepted Answer

A)  $195,000 
B)  $220,000 
C)  $175,000 
D)  $215,000 
A)  $195,000 
B)  $220,000 
C)  $175,000 
D)  $215,000

Question 11

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock.

Accepted Answer

A)  1 
B)  10 
C)  100 
D)  1,000 
A)  1 
B)  10 
C)  100 
D)  1,000

Question 12

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

Question 13

All else the same, an American-style option will be ________ valuable than a ________ style option.

Accepted Answer

A)  more; European- 
B)  less; European- 
C)  more; Canadian- 
D)  less; Canadian- 
A)  more; European- 
B)  less; European- 
C)  more; Canadian- 
D)  less; Canadian-

Question 14

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

Accepted Answer

A)  SPX 
B)  DJX 
C)  CME 
D)  OEX 
A)  SPX 
B)  DJX 
C)  CME 
D)  OEX

Question 15

You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a ________ on the investment.

Accepted Answer

A)  $300 profit 
B)  $100 loss 
C)  $400 loss 
D)  $200 profit 
A)  $300 profit 
B)  $100 loss 
C)  $400 loss 
D)  $200 profit

Question 16

You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

Accepted Answer

A)  $200 profit 
B)  $200 loss 
C)  $500 profit 
D)  $500 loss 
A)  $200 profit 
B)  $200 loss 
C)  $500 profit 
D)  $500 loss

Question 17

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

Accepted Answer

A)  $24.15 
B)  $25 
C)  $25.87 
D)  $27.86 
A)  $24.15 
B)  $25 
C)  $25.87 
D)  $27.86

Question 18

An Asian put option gives its holder 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 a price determined by the average stock price during some specified portion of the option's life 
C)  sell the underlying asset at the exercise price on or before the expiration date 
D)  sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life 
A)  buy the underlying asset at the exercise price on or before the expiration date 
B)  buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life 
C)  sell the underlying asset at the exercise price on or before the expiration date 
D)  sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Question 19

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 calls, you would ________.

Accepted Answer

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

Question 20

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is ________ than if you buy at-the-money puts and your maximum gain is ________.

Accepted Answer

A)  greater; lower 
B)  greater; greater 
C)  lower; greater 
D)  lower; lower 
A)  greater; lower 
B)  greater; greater 
C)  lower; greater 
D)  lower; lower

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

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________.

A writer of a call option will want the value of the underlying asset to , and a buyer of a put option will want the value of the underlying asset to .

Why is the holder of an option not required to post margin under the Option Clearing Corporation rules?

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock.

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

All else the same, an American-style option will be valuable than a style option.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a ________ on the investment.

You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

An Asian put option gives its holder the right to ________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

Exam 15: Options Markets

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

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________.

A writer of a call option will want the value of the underlying asset to ________, and a buyer of a put option will want the value of the underlying asset to ________.

Why is the holder of an option not required to post margin under the Option Clearing Corporation rules?

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock.

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

All else the same, an American-style option will be ________ valuable than a ________ style option.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a ________ on the investment.

You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

An Asian put option gives its holder the right to ________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

A writer of a call option will want the value of the underlying asset to , and a buyer of a put option will want the value of the underlying asset to .

All else the same, an American-style option will be valuable than a style option.