Question 1

Exhibit 20.5
Use the Information Below for the Following Problem(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 20.5.What is Sarah's annualized gain/loss?

Accepted Answer

A)   11.51% gain
B)   115.15% gain
C)   11.51% loss
D)   115.15% loss
E)   None of the above B

Question 2

The futures market is a dealer market where all the details of the transactions are negotiated.

Accepted Answer

A) True 
 B)False  False

Question 3

A call option is in the money if the current market price is above the strike price.

Accepted Answer

A) True 
 B)False  True

Question 4

A put option is in the money if the current market price is above the strike price.

Accepted Answer

A) True 
 B)False

Question 5

The payoffs to both long and short position in the forward contact are symmetric around the contract price.

Accepted Answer

A) True 
 B)False

Question 6

A cash or spot contract is an agreement for the immediate delivery of an asset such as the purchase of stock on the NYSE.

Accepted Answer

A) True 
 B)False

Question 7

A primary function of futures markets is to allow investors to transfer risk.

Accepted Answer

A) True 
 B)False

Question 8

In the two state option pricing model,which of the following does not influence the option price?

Accepted Answer

A)   Past stock price
B)   Up and down factors u and d
C)   The risk free rate
D)   The exercise price
E)   Current stock price

Question 9

Exhibit 20.5
Use the Information Below for the Following Problem(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 20.5.If at expiration Peppy is selling for $47.00,what is Sarah's dollar gain or loss?

Accepted Answer

A)   $25 loss
B)   $250 loss
C)   $25 gain
D)   $250 gain
E)   None of the above

Question 10

Assume that you have purchased a call option with a strike price $60 for $5.At the same time you purchase a put option on the same stock with a strike price of $60 for $4.If the stock is currently selling for $75 per share,calculate the dollar return on this option strategy.

Accepted Answer

A)   $10
B)   -$4
C)   $5
D)   $6
E)   $15

Question 11

Exhibit 20.6
Use the Information Below for the Following Problem(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-Refer to Exhibit 20.6.How could an investor create arbitrage profits?

Accepted Answer

A)   Sell the stock short, write a put, buy a call and invest the proceeds at the risk-free rate.
B)   Buy the stock, write a put, buy a call and invest the proceeds at the risk-free rate.
C)   Sell the stock short, buy a put, write a call and invest the proceeds at the risk-free rate.
D)   Buy the stock, write a put, buy a call and borrow the strike price at the risk-free rate.
E)   Sell the stock short, write a put, buy a call and borrow the strike price at the risk-free rate.

Question 12

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

Accepted Answer

A) True 
 B)False

Question 13

A one year call option has a strike price of 60,expires in 6 months,and has a price of $2.5.If the risk free rate is 7%,and the current stock price is $55,what should the corresponding put be worth?

Accepted Answer

A)   $5.00
B)   $4.56
C)   $5.50
D)   $7.08
E)   $7.54

Question 14

According to put/call parity

Accepted Answer

A)   Stock price + Call Price = Put Price + Risk Free Bond Price
B)   Stock price + Put Price = Call Price + Risk Free Bond Price
C)   Put price + Call Price = Stock Price + Risk Free Bond Price
D)   Stock price - Put Price = Call Price + Risk Free Bond Price
E)   Stock price + Call Price = Put Price - Risk Free Bond Price

Question 15

Which of the following statements is false?

Accepted Answer

A)   Derivatives help shift risk from risk-adverse investors to risk-takers.
B)   Derivatives assist in forming cash prices.
C)   Derivatives provide additional information to the market.
D)   In many cases, the investment in derivatives (both commissions and required investment)  is more than in the cash market.
E)   None of the above (that is, all are reasons)

Question 16

Which of the following statements is a true definition of an out-of-the-money option?

Accepted Answer

A)   A call option in which the stock price exceeds the exercise price.
B)   A call option in which the exercise price exceeds the stock price .
C)   A call option in which the exercise price exceeds the stock price. 
D)   A put option in which the exercise price exceeds the stock price.
E)   A call option in which the call premium exceeds the stock price.

Question 17

Consider a stock that is currently trading at $45.Calculate the intrinsic value for a call option that has an exercise price of $35.

Accepted Answer

A)   $25
B)   $35
C)   $0
D)   -$10
E)   $10

Question 18

Which of the following is consistent with put-call-spot parity?

Accepted Answer

A)   S + C = P + X/(1 + RFR) 
B)   S + P = C + X/(1 + RFR) 
C)   S - C = P + X/(1 + RFR) 
D)   S - P = C + X/(1 + RFR) 
E)   S = P - C + X/(1 + RFR)

Question 19

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

Accepted Answer

A)   Not correlated with the existing exposure.
B)   Positively correlated with the existing exposure.
C)   Negatively correlated with the existing exposure.
D)   Any of the above.
E)   None of the above.

Question 20

All features of a forward contract are standardized,except for price and number of contracts.

Accepted Answer

A) True 
 B)False

Exam 20: An Introduction to Derivative Markets and Securities

Exhibit 20.5 Use the Information Below for the Following Problem(S) Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 20.5.What is Sarah's annualized gain/loss?

The futures market is a dealer market where all the details of the transactions are negotiated.

A call option is in the money if the current market price is above the strike price.

A put option is in the money if the current market price is above the strike price.

The payoffs to both long and short position in the forward contact are symmetric around the contract price.

A cash or spot contract is an agreement for the immediate delivery of an asset such as the purchase of stock on the NYSE.

A primary function of futures markets is to allow investors to transfer risk.

In the two state option pricing model,which of the following does not influence the option price?

Assume that you have purchased a call option with a strike price $60 for $5.At the same time you purchase a put option on the same stock with a strike price of $60 for $4.If the stock is currently selling for $75 per share,calculate the dollar return on this option strategy.

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

A one year call option has a strike price of 60,expires in 6 months,and has a price of $2.5.If the risk free rate is 7%,and the current stock price is $55,what should the corresponding put be worth?

According to put/call parity

Which of the following statements is false?

Which of the following statements is a true definition of an out-of-the-money option?

Consider a stock that is currently trading at $45.Calculate the intrinsic value for a call option that has an exercise price of $35.

Which of the following is consistent with put-call-spot parity?

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

All features of a forward contract are standardized,except for price and number of contracts.