Question 1

Which one of the following statements concerning options is correct?

Accepted Answer

A)  The owner of a call is entitled to the dividends paid on the underlying shares of stock. 
B)  Option holders can profit on movements of the price of the underlying security. 
C)  One option covers 2,000 shares. 
D)  A put gives the option holder the right to buy a stated amount of securities. 
A)  The owner of a call is entitled to the dividends paid on the underlying shares of stock. 
B)  Option holders can profit on movements of the price of the underlying security. 
C)  One option covers 2,000 shares. 
D)  A put gives the option holder the right to buy a stated amount of securities.

Question 2

Listed options

Accepted Answer

A)  are rarely traded in the secondary markets. 
B)  are traded directly between the buyer and the seller. 
C)  have readily available price information. 
D)  are sold over the counter. 
A)  are rarely traded in the secondary markets. 
B)  are traded directly between the buyer and the seller. 
C)  have readily available price information. 
D)  are sold over the counter.

Question 3

Because puts and calls derive their value from the behaviour of some other real or financial asset, they are known as derivative securities.

Accepted Answer

A) True 
 B)False

Question 4

Puts and calls are issued by the same corporation that issued the underlying share.

Accepted Answer

A) True 
 B)False

Question 5

A long straddle

Accepted Answer

A)  is a strategy that produces profits when the price of the underlying security moves significantly in either direction. 
B)  is a strategy based on the expectation that the price of the underlying security will be relatively constant. 
C)  consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security. 
D)  consists of buying a call at one strike price and then writing a call at a higher strike price. 
A)  is a strategy that produces profits when the price of the underlying security moves significantly in either direction. 
B)  is a strategy based on the expectation that the price of the underlying security will be relatively constant. 
C)  consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security. 
D)  consists of buying a call at one strike price and then writing a call at a higher strike price.

Question 6

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

Accepted Answer

A) True 
 B)False

Question 7

Writing covered calls protects the writer from losses if the price of the underlying share declines.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following actions would be the most appropriate hedge to a short sale of shares?

Accepted Answer

A)  Sale of a call. 
B)  Purchase of a call. 
C)  Purchase of a put. 
D)  Sale of a put. 
A)  Sale of a call. 
B)  Purchase of a call. 
C)  Purchase of a put. 
D)  Sale of a put.

Question 9

A naked option is a conservative investment with limited risk.

Accepted Answer

A) True 
 B)False

Question 10

Rights are long- term call options attached to bonds while warrants are short- term call options attached to shares.

Accepted Answer

A) True 
 B)False

Question 11

The writer of a put

Accepted Answer

A)  is hoping that the put will be in- the- money prior to expiration. 
B)  accepts the obligation to sell a predetermined number of shares at a predetermined price. 
C)  is betting the price of the underlying security will increase in value. 
D)  will pay the premium whether or not the option is exercised. 
A)  is hoping that the put will be in- the- money prior to expiration. 
B)  accepts the obligation to sell a predetermined number of shares at a predetermined price. 
C)  is betting the price of the underlying security will increase in value. 
D)  will pay the premium whether or not the option is exercised.

Question 12

Which one of the following was the first listed exchange for stock options in the United States?

Accepted Answer

A)  Chicago Board Options Exchange. 
B)  Philadelphia Board of Trade. 
C)  Stock Index Board. 
D)  New York Stock Exchange. 
A)  Chicago Board Options Exchange. 
B)  Philadelphia Board of Trade. 
C)  Stock Index Board. 
D)  New York Stock Exchange.

Question 13

American style options can only be exercised on their expiration dates.

Accepted Answer

A) True 
 B)False

Question 14

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying share prior to the contract expiration.

Accepted Answer

A) True 
 B)False

Question 15

The maximum amount the buyer of a put can lose is the cost of the option.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true about rights?

Accepted Answer

A)  The owner has several years in which to exercise the option. 
B)  They are a type of short- lived call option. 
C)  They are a type of short- lived put option. 
D)  They are usually attached to bonds as a "sweetener" 
A)  The owner has several years in which to exercise the option. 
B)  They are a type of short- lived call option. 
C)  They are a type of short- lived put option. 
D)  They are usually attached to bonds as a "sweetener"

Question 17

The writer of a covered call has taken a(n)

Accepted Answer

A)  conservative investment position with limited profits. 
B)  conservative investment position with unlimited potential profits. 
C)  aggressive position with limited losses and unlimited potential profits. 
D)  aggressive position with potentially unlimited profits or losses. 
A)  conservative investment position with limited profits. 
B)  conservative investment position with unlimited potential profits. 
C)  aggressive position with limited losses and unlimited potential profits. 
D)  aggressive position with potentially unlimited profits or losses.

Question 18

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

Accepted Answer

A) True 
 B)False

Question 19

The most important factor affecting the market price of a put or call is the

Accepted Answer

A)  expiration date. 
B)  market interest rate. 
C)  price behaviour of the corresponding warrant. 
D)  price behaviour of the underlying shares. 
A)  expiration date. 
B)  market interest rate. 
C)  price behaviour of the corresponding warrant. 
D)  price behaviour of the underlying shares.

Question 20

The longer the time to expiration, the lower the option time premium tends to be.

Accepted Answer

A) True 
 B)False

Which one of the following statements concerning options is correct?

Listed options

Because puts and calls derive their value from the behaviour of some other real or financial asset, they are known as derivative securities.

Puts and calls are issued by the same corporation that issued the underlying share.

A long straddle

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

Writing covered calls protects the writer from losses if the price of the underlying share declines.

Which one of the following actions would be the most appropriate hedge to a short sale of shares?

A naked option is a conservative investment with limited risk.

Rights are long- term call options attached to bonds while warrants are short- term call options attached to shares.

The writer of a put

Which one of the following was the first listed exchange for stock options in the United States?

American style options can only be exercised on their expiration dates.

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying share prior to the contract expiration.

The maximum amount the buyer of a put can lose is the cost of the option.

Which of the following is true about rights?

The writer of a covered call has taken a(n)

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

The most important factor affecting the market price of a put or call is the

The longer the time to expiration, the lower the option time premium tends to be.

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

Which one of the following statements concerning options is correct?

Listed options

Because puts and calls derive their value from the behaviour of some other real or financial asset, they are known as derivative securities.

Puts and calls are issued by the same corporation that issued the underlying share.

A long straddle

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

Writing covered calls protects the writer from losses if the price of the underlying share declines.

Which one of the following actions would be the most appropriate hedge to a short sale of shares?

A naked option is a conservative investment with limited risk.

Rights are long- term call options attached to bonds while warrants are short- term call options attached to shares.

The writer of a put

Which one of the following was the first listed exchange for stock options in the United States?

American style options can only be exercised on their expiration dates.

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying share prior to the contract expiration.

The maximum amount the buyer of a put can lose is the cost of the option.

Which of the following is true about rights?

The writer of a covered call has taken a(n)

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

The most important factor affecting the market price of a put or call is the

The longer the time to expiration, the lower the option time premium tends to be.

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