Question 1

ETF options are settled in

Accepted Answer

A)  the writer has the choice of settling in either cash or ETF shares. 
B)  ETF shares. 
C)  share of the companies in the index. 
D)  cash. 
A)  the writer has the choice of settling in either cash or ETF shares. 
B)  ETF shares. 
C)  share of the companies in the index. 
D)  cash. B

Question 2

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?

Accepted Answer

A)  $100. 
B)  $3,250. 
C)  $350. 
D)  Her profit potential is unlimited. 
A)  $100. 
B)  $3,250. 
C)  $350. 
D)  Her profit potential is unlimited. B

Question 3

One reason that writing options can be a viable and profitable investment strategy is that

Accepted Answer

A)  an option writer can exercise the option to avoid a potential loss. 
B)  most options expire unexercised. 
C)  an option writer determines when the option is exercised. 
D)  the option writer collects the quarterly dividends. 
A)  an option writer can exercise the option to avoid a potential loss. 
B)  most options expire unexercised. 
C)  an option writer determines when the option is exercised. 
D)  the option writer collects the quarterly dividends. B

Question 4

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

Accepted Answer

A)  covering a short position. 
B)  writing a naked call. 
C)  writing a covered call. 
D)  creating a naked cover. 
A)  covering a short position. 
B)  writing a naked call. 
C)  writing a covered call. 
D)  creating a naked cover.

Question 5

Which one of the following options is more expensive? Show all calculations.
(a) A six- month put that carries a $40 strike price on a share that is currently trading at $35.84, given that the put trades at a 15 percent investment premium; or
(b) A six- month call that carries a $50 strike price on a share that currently trades at $54.75, while the call trades with a 12 percent investment premium?

Accepted Answer

(a) Value of put = ($40.00 - $35.84) = $

Question 6

For all practical purposes, listed share options always expire

Accepted Answer

A)  on the last business day of the expiration month. 
B)  on the Thursday before the last Friday of the expiration month. 
C)  three months from the date of the option purchase. 
D)  on the first Monday of every calendar quarter. 
A)  on the last business day of the expiration month. 
B)  on the Thursday before the last Friday of the expiration month. 
C)  three months from the date of the option purchase. 
D)  on the first Monday of every calendar quarter.

Question 7

Listed options trade over- the- counter.

Accepted Answer

A) True 
 B)False

Question 8

The value of an interest rate call option

Accepted Answer

A)  is based on the market price of U.S. Treasury securities. 
B)  increases when the yield on the underlying Treasury security rises. 
C)  decreases when the price of U.S. Treasuries decreases. 
D)  varies directly with the price of the underlying corporate bond. 
A)  is based on the market price of U.S. Treasury securities. 
B)  increases when the yield on the underlying Treasury security rises. 
C)  decreases when the price of U.S. Treasuries decreases. 
D)  varies directly with the price of the underlying corporate bond.

Question 9

Amy owns 100 shares of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near- term decline if it occurs. Therefore, Amy writes a covered call at a strike price of $55 and a premium of $2.
a() How will the covered call help Amy profit if the expected price decline occurs?
b() What is the maximum loss Amy can incur from the call?
c() What is the maximum profit Amy can incur from the call?

Accepted Answer

(a) If the stock declines to $45 a share

Question 10

For the writer of in- the- money covered calls, losses on the options contract will be nullified by gains on the shares.

Accepted Answer

A) True 
 B)False

Question 11

The premium on a share- index call would be expected to increase as the

Accepted Answer

A)  option life nears expiration. 
B)  index price falls further below the strike price. 
C)  underlying securities stabilise in value. 
D)  market becomes more volatile. 
A)  option life nears expiration. 
B)  index price falls further below the strike price. 
C)  underlying securities stabilise in value. 
D)  market becomes more volatile.

Question 12

Many options expire without being exercised.

Accepted Answer

A) True 
 B)False

Question 13

Rights are call options issued to current owners of the shares and normally expire within a short period of time.

Accepted Answer

A) True 
 B)False

Question 14

One could temporarily protect profits on a highly diversified portfolio of large company shares by

Accepted Answer

A)  buying ASX 200 Index put options. 
B)  buying ASX 200 Index call options. 
C)  selling ASX 200 Index call options. 
D)  selling ASX 200 Index put options. 
A)  buying ASX 200 Index put options. 
B)  buying ASX 200 Index call options. 
C)  selling ASX 200 Index call options. 
D)  selling ASX 200 Index put options.

Question 15

Purchasers of share options

Accepted Answer

A)  have the right to buy or sell a certain number of underlying shares. 
B)  own a financial asset with benefits of firm ownership. 
C)  have the obligation to buy or sell a predetermined amount of shares at the strike price. 
D)  have a claim on the profits of the firm issuing the underlying securities. 
A)  have the right to buy or sell a certain number of underlying shares. 
B)  own a financial asset with benefits of firm ownership. 
C)  have the obligation to buy or sell a predetermined amount of shares at the strike price. 
D)  have a claim on the profits of the firm issuing the underlying securities.

Question 16

The writer of a call option is theoretically exposed to an unlimited loss.

Accepted Answer

A) True 
 B)False

Question 17

Grant purchased one call on XYZ shares at an exercise price of $25. The market price of XYZ shares when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction- related costs.

Accepted Answer

A)  $500. 
B)  $480. 
C)  $380. 
D)  $600. 
A)  $500. 
B)  $480. 
C)  $380. 
D)  $600.

Question 18

The strike price of a put option is the price

Accepted Answer

A)  of the underlying share at the time that the options contract is purchased. 
B)  at which the underlying share can be sold. 
C)  at which the underlying share can be bought. 
D)  an investor must pay for the options contract. 
A)  of the underlying share at the time that the options contract is purchased. 
B)  at which the underlying share can be sold. 
C)  at which the underlying share can be bought. 
D)  an investor must pay for the options contract.

Question 19

Fred bought 600 shares of Edgewood shares at a price of $19. The shares are currently selling for $53 a share. To protect his profits, Fred should buy

Accepted Answer

A)  6 put options with a strike price of $50. 
B)  6 call options with a strike price of $55. 
C)  600 call options with a strike price of $55. 
D)  600 put options with a strike price of $50. 
A)  6 put options with a strike price of $50. 
B)  6 call options with a strike price of $55. 
C)  600 call options with a strike price of $55. 
D)  600 put options with a strike price of $50.

Question 20

If the Canadian dollar became stronger relative to the Australian dollar, the price of

Accepted Answer

A)  both the call and the put options on the Canadian dollar will decrease. 
B)  a call option on the Canadian dollar will decrease. 
C)  a call option on the Canadian dollar will increase. 
D)  a put option on the Canadian dollar will increase. 
A)  both the call and the put options on the Canadian dollar will decrease. 
B)  a call option on the Canadian dollar will decrease. 
C)  a call option on the Canadian dollar will increase. 
D)  a put option on the Canadian dollar will increase.

ETF options are settled in

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?

One reason that writing options can be a viable and profitable investment strategy is that

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

For all practical purposes, listed share options always expire

Listed options trade over- the- counter.

The value of an interest rate call option

For the writer of in- the- money covered calls, losses on the options contract will be nullified by gains on the shares.

The premium on a share- index call would be expected to increase as the

Many options expire without being exercised.

Rights are call options issued to current owners of the shares and normally expire within a short period of time.

One could temporarily protect profits on a highly diversified portfolio of large company shares by

Purchasers of share options

The writer of a call option is theoretically exposed to an unlimited loss.

The strike price of a put option is the price

Fred bought 600 shares of Edgewood shares at a price of $19. The shares are currently selling for $53 a share. To protect his profits, Fred should buy

If the Canadian dollar became stronger relative to the Australian dollar, the price of

The Investment Environment

Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Modern Portfolio Concepts

Shares

Analysing Shares

Share Valuation

Technical Analysis, Market Efficiency and Behavioural Finance

Fixed-Income Securities

Bond Valuation

Managed Funds: Professionally Managed Portfolios

Managing Your Own Portfolio

Commodities and Financial Futures

Filters

Exam 14: Options: Puts and Calls

ETF options are settled in

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?

One reason that writing options can be a viable and profitable investment strategy is that

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

For all practical purposes, listed share options always expire

Listed options trade over- the- counter.

The value of an interest rate call option

For the writer of in- the- money covered calls, losses on the options contract will be nullified by gains on the shares.

The premium on a share- index call would be expected to increase as the

Many options expire without being exercised.

Rights are call options issued to current owners of the shares and normally expire within a short period of time.

One could temporarily protect profits on a highly diversified portfolio of large company shares by

Purchasers of share options

The writer of a call option is theoretically exposed to an unlimited loss.

The strike price of a put option is the price

Fred bought 600 shares of Edgewood shares at a price of $19. The shares are currently selling for $53 a share. To protect his profits, Fred should buy

If the Canadian dollar became stronger relative to the Australian dollar, the price of

The Investment Environment

Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Modern Portfolio Concepts

Shares

Analysing Shares

Share Valuation

Technical Analysis, Market Efficiency and Behavioural Finance

Fixed-Income Securities

Bond Valuation

Managed Funds: Professionally Managed Portfolios

Managing Your Own Portfolio

Commodities and Financial Futures

Filters