Question 1

Derivative securities are also called contingent claims because

Accepted Answer

A) their owners may choose whether or not to exercise them. 
B) a large contingent of investors holds them. 
C) the writers may choose whether or not to exercise them. 
D) their payoffs depend on the prices of other assets. 
A) their owners may choose whether or not to exercise them. 
B) a large contingent of investors holds them. 
C) the writers may choose whether or not to exercise them. 
D) their payoffs depend on the prices of other assets. D

Question 2

Asian options differ from American and European options in that

Accepted Answer

A) they are only sold in Asian financial markets. 
B) they never expire. 
C) their payoff is based on the average price of the underlying asset. 
D) they are only sold in Asian financial markets and they never expire. 
A) they are only sold in Asian financial markets. 
B) they never expire. 
C) their payoff is based on the average price of the underlying asset. 
D) they are only sold in Asian financial markets and they never expire. C

Question 3

A collar with a net outlay of approximately zero is an options strategy that

Accepted Answer

A) combines a put and a call to lock in a price range for a security. 
B) uses the gains from sale of a call to purchase a put. 
C) uses the gains from sale of a put to purchase a call. 
D) combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. 
A) combines a put and a call to lock in a price range for a security. 
B) uses the gains from sale of a call to purchase a put. 
C) uses the gains from sale of a put to purchase a call. 
D) combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. D

Question 4

An option with an exercise price equal to the underlying asset's price is

Accepted Answer

A) worthless. 
B) in the money. 
C) at the money. 
D) out of the money. 
A) worthless. 
B) in the money. 
C) at the money. 
D) out of the money.

Question 5

The price that the buyer of a call option pays to acquire the option is called the

Accepted Answer

A) strike price. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) premium. 
A) strike price. 
B) exercise price. 
C) execution price. 
D) acquisition price. 
E) premium.

Question 6

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) None of the options are correct. 
A) is out of the money. 
B) is in the money. 
C) is at the money. 
D) None of the options are correct.

Question 7

Barrier options have payoffs that

Accepted Answer

A) have payoffs that only depend on the minimum price of the underlying asset during the life of the option. 
B) depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. 
C) are known in advance. 
D) have payoffs that only depend on the maximum price of the underlying asset during the life of the option. 
A) have payoffs that only depend on the minimum price of the underlying asset during the life of the option. 
B) depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. 
C) are known in advance. 
D) have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

Question 8

Trading in "exotic options" takes place primarily

Accepted Answer

A) on the New York Stock Exchange. 
B) in the over-the-counter market. 
C) on the American Stock Exchange. 
D) in the primary marketplace. 
A) on the New York Stock Exchange. 
B) in the over-the-counter market. 
C) on the American Stock Exchange. 
D) in the primary marketplace.

Question 9

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

Accepted Answer

A) $500. 
B) $300. 
C) zero. 
D) $200. 
A) $500. 
B) $300. 
C) zero. 
D) $200.

Question 10

An American call option allows the buyer to

Accepted Answer

A) sell the underlying asset at the exercise price on or before the expiration date. 
B) buy the underlying asset at the exercise price on or before the expiration date. 
C) sell the option in the open market prior to expiration. 
D) sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. 
E) buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. 
A) sell the underlying asset at the exercise price on or before the expiration date. 
B) buy the underlying asset at the exercise price on or before the expiration date. 
C) sell the option in the open market prior to expiration. 
D) sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. 
E) buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

Question 11

An American put option allows the holder to

Accepted Answer

A) buy the underlying asset at the striking price on or before the expiration date. 
B) sell the underlying asset at the striking price on or before the expiration date. 
C) potentially benefit from a stock price increase. 
D) sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. 
A) buy the underlying asset at the striking price on or before the expiration date. 
B) sell the underlying asset at the striking price on or before the expiration date. 
C) potentially benefit from a stock price increase. 
D) sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

Question 12

The maximum loss a buyer of a stock put option can suffer is equal to

Accepted Answer

A) the striking price minus the stock price. 
B) the stock price minus the value of the call. 
C) the put premium. 
D) the stock price. 
A) the striking price minus the stock price. 
B) the stock price minus the value of the call. 
C) the put premium. 
D) the stock price.

Question 13

A protective put strategy is

Accepted Answer

A) a long put plus a long position in the underlying asset. 
B) a long put plus a long call on the same underlying asset. 
C) a long call plus a short put on the same underlying asset. 
D) a long put plus a short call on the same underlying asset. 
A) a long put plus a long position in the underlying asset. 
B) a long put plus a long call on the same underlying asset. 
C) a long call plus a short put on the same underlying asset. 
D) a long put plus a short call on the same underlying asset.

Question 14

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

Accepted Answer

A) $500. 
B) $300. 
C) $800. 
D) $200. 
A) $500. 
B) $300. 
C) $800. 
D) $200.

Question 15

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%.What is the price of a one-year put with strike price of $55?

Accepted Answer

A) $9.00 
B) $12.89 
C) $16.00 
D) $18.72 
A) $9.00 
B) $12.89 
C) $16.00 
D) $18.72

Question 16

A call option on a stock is said to be at the money if

Accepted Answer

A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call. 
A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call.

Question 17

Financial engineering

Accepted Answer

A) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B) primarily takes place for the institutional investor. 
C) primarily takes places for the individual investor. 
D) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for the institutional investor. 
A) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. 
B) primarily takes place for the institutional investor. 
C) primarily takes places for the individual investor. 
D) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for the institutional investor.

Question 18

A put option on a stock is said to be at the money if

Accepted Answer

A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call. 
A) the exercise price is higher than the stock price. 
B) the exercise price is less than the stock price. 
C) the exercise price is equal to the stock price. 
D) the price of the put is higher than the price of the call.

Question 19

The value of a stock put option is positively related to the following factors except

Accepted Answer

A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) All of the options are correct. 
A) the time to expiration. 
B) the striking price. 
C) the stock price. 
D) All of the options are correct.

Question 20

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70, the put

Accepted Answer

A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the market price of Boeing stock is $70. 
D) is out of the money and sells for a higher price than if the market price of Boeing stock is $70. 
A) is out of the money. 
B) is in the money. 
C) sells for a higher price than if the market price of Boeing stock is $70. 
D) is out of the money and sells for a higher price than if the market price of Boeing stock is $70.

Exam 20: Options Markets: Introduction

Derivative securities are also called contingent claims because

Asian options differ from American and European options in that

A collar with a net outlay of approximately zero is an options strategy that

An option with an exercise price equal to the underlying asset's price is

The price that the buyer of a call option pays to acquire the option is called the

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

Barrier options have payoffs that

Trading in "exotic options" takes place primarily

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

An American call option allows the buyer to

An American put option allows the holder to

The maximum loss a buyer of a stock put option can suffer is equal to

A protective put strategy is

You buy one Home Depot June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%.What is the price of a one-year put with strike price of $55?

A call option on a stock is said to be at the money if

Financial engineering

A put option on a stock is said to be at the money if

The value of a stock put option is positively related to the following factors except

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70, the put

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