Question 1

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

Accepted Answer

A) strike price. 
B) exercise price. 
C) execution price. 
D) strike price or execution price. 
E) strike price or exercise price. 
A) strike price. 
B) exercise price. 
C) execution price. 
D) strike price or execution price. 
E) strike price or exercise price.

Question 2

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

Accepted Answer

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

Question 3

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. At expiration, you break even if the stock price is equal to

Accepted Answer

A) $52. 
B) $60. 
C) $68. 
D) either $52 or $68. 
A) $52. 
B) $60. 
C) $68. 
D) either $52 or $68.

Question 4

A call option on a stock is said to be in 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 5

Lookback options have payoffs that

Accepted Answer

A) depend in part on the minimum or maximum price of the underlying asset during the life of the option. 
B) only depend on the minimum price of the underlying asset during the life of the option. 
C) only depend on the maximum price of the underlying asset during the life of the option. 
D) are known in advance. 
A) depend in part on the minimum or maximum price of the underlying asset during the life of the option. 
B) only depend on the minimum price of the underlying asset during the life of the option. 
C) only depend on the maximum price of the underlying asset during the life of the option. 
D) are known in advance.

Question 6

You purchase one IBM 200 call option for a premium of $6.Ignoring transaction costs, the break-even price of the position is

Accepted Answer

A) $194. 
B) $228. 
C) $206. 
D) $211. +200 + $6 = $206. 
A) $194. 
B) $228. 
C) $206. 
D) $211. +200 + $6 = $206.

Question 7

A callable bond should be priced the same as

Accepted Answer

A) a convertible bond. 
B) a straight bond plus a put option. 
C) a straight bond plus a call option. 
D) a straight bond plus warrants. 
A) a convertible bond. 
B) a straight bond plus a put option. 
C) a straight bond plus a call option. 
D) a straight bond plus warrants.

Question 8

The potential loss for a writer of a naked call option on a stock is

Accepted Answer

A) limited. 
B) unlimited. 
C) increasing when the stock price is decreasing. 
D) equal to the call premium. 
A) limited. 
B) unlimited. 
C) increasing when the stock price is decreasing. 
D) equal to the call premium.

Question 9

The price that the writer of a call option receives to sell 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 10

What happens to an option if the underlying stock has a 3-for-1 split?

Accepted Answer

A) There is no change in either the exercise price or in the number of options held. 
B) The exercise price will adjust through normal market movements; the number of options will remain the same. 
C) The exercise price would become one-third of what it was, and the number of options held would triple. 
D) The exercise price would triple, and the number of options held would triple. 
A) There is no change in either the exercise price or in the number of options held. 
B) The exercise price will adjust through normal market movements; the number of options will remain the same. 
C) The exercise price would become one-third of what it was, and the number of options held would triple. 
D) The exercise price would triple, and the number of options held would triple.

Question 11

You purchase one IBM March 200 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy?

Accepted Answer

A) $20,000 
B) $20,600 
C) $19,400 
D) $19,000 
A) $20,000 
B) $20,600 
C) $19,400 
D) $19,000

Question 12

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

Accepted Answer

A) increases to $204. 
B) decreases to $190. 
C) increases to $206. 
D) decreases to $196. 
A) increases to $204. 
B) decreases to $190. 
C) increases to $206. 
D) decreases to $196.

Question 13

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

Accepted Answer

A) strike price. 
B) exercise price. 
C) execution price. 
D) strike price or exercise price. 
E) None of the options are correct. 
A) strike price. 
B) exercise price. 
C) execution price. 
D) strike price or exercise price. 
E) None of the options are correct.

Question 14

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position?

Accepted Answer

A) $65 
B) $75 
C) $5 
D) $70 
A) $65 
B) $75 
C) $5 
D) $70

Question 15

What happens to an option if the underlying stock has a 2-for-1 split?

Accepted Answer

A) There is no change in either the exercise price or in the number of options held. 
B) The exercise price will adjust through normal market movements; the number of options will remain the same. 
C) The exercise price would become one-half of what it was, and the number of options held would double. 
D) The exercise price would double, and the number of options held would double. 
A) There is no change in either the exercise price or in the number of options held. 
B) The exercise price will adjust through normal market movements; the number of options will remain the same. 
C) The exercise price would become one-half of what it was, and the number of options held would double. 
D) The exercise price would double, and the number of options held would double.

Question 16

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy?

Accepted Answer

A) $7,000 
B) $400 
C) $7,400 
D) $6,600 
A) $7,000 
B) $400 
C) $7,400 
D) $6,600

Question 17

Before expiration, the time value of a call option is equal to

Accepted Answer

A) zero. 
B) the actual call price minus the intrinsic value of the call. 
C) the intrinsic value of the call. 
D) the actual call price plus the intrinsic value of the call. 
A) zero. 
B) the actual call price minus the intrinsic value of the call. 
C) the intrinsic value of the call. 
D) the actual call price plus the intrinsic value of the call.

Question 18

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher.

Accepted Answer

A) more; more 
B) more; less 
C) less; more 
D) less; less 
A) more; more 
B) more; less 
C) less; more 
D) less; less

Question 19

A covered call position is

Accepted Answer

A) the simultaneous purchase of the call and the underlying asset. 
B) the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C) the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D) the purchase of a share of stock with a simultaneous sale of a call on that stock. 
A) the simultaneous purchase of the call and the underlying asset. 
B) the purchase of a share of stock with a simultaneous sale of a put on that stock. 
C) the short sale of a share of stock with a simultaneous sale of a call on that stock. 
D) the purchase of a share of stock with a simultaneous sale of a call on that stock.

Question 20

The price that the buyer of a put 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.

Exam 20: Options Markets: Introduction

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your 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. At expiration, you break even if the stock price is equal to

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

Lookback options have payoffs that

You purchase one IBM 200 call option for a premium of $6.Ignoring transaction costs, the break-even price of the position is

A callable bond should be priced the same as

The potential loss for a writer of a naked call option on a stock is

The price that the writer of a call option receives to sell the option is called the

What happens to an option if the underlying stock has a 3-for-1 split?

You purchase one IBM March 200 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy?

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position?

What happens to an option if the underlying stock has a 2-for-1 split?

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy?

Before expiration, the time value of a call option is equal to

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher.

A covered call position is

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

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

To the option holder, put options are worth when the exercise price is higher; call options are worth when the exercise price is higher.