Question 1

Over- the- counter options are less structured than listed options and are primarily purchased by individual investors.

Accepted Answer

A) True 
 B)False

Question 2

ABC shares are currently selling for $128. Which of the following options is "in- the- money"?

Accepted Answer

A)  February 125 call. 
B)  March 125 put. 
C)  February 100 put. 
D)  March 130 call. 
A)  February 125 call. 
B)  March 125 put. 
C)  February 100 put. 
D)  March 130 call.

Question 3

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Accepted Answer

A) True 
 B)False

Question 4

In nearly all cases, the purpose of a hedge is to

Accepted Answer

A)  speculate on a downward drop in a general market index. 
B)  speculate on an upward movement in a given currency. 
C)  reduce or eliminate risk. 
D)  make a very high profit in an extremely short time frame. 
A)  speculate on a downward drop in a general market index. 
B)  speculate on an upward movement in a given currency. 
C)  reduce or eliminate risk. 
D)  make a very high profit in an extremely short time frame.

Question 5

The maker of a put or call is the

Accepted Answer

A)  party who decides whether or not the option is exercised. 
B)  party who writes the option. 
C)  person who facilitates the trade on the floor of the exchange. 
D)  company which issued the underlying security. 
A)  party who decides whether or not the option is exercised. 
B)  party who writes the option. 
C)  person who facilitates the trade on the floor of the exchange. 
D)  company which issued the underlying security.

Question 6

If you expect the price of a security to decline, you could buy a call to protect your financial position.

Accepted Answer

A) True 
 B)False

Question 7

Jason purchased a six- month put on ABC shares at a cost of $100. The strike price was $15. At what market price does Jason just break- even on this investment? Ignore transaction costs and taxes.

Accepted Answer

A)  $16. 
B)  $15. 
C)  $14. 
D)  Cannot be determined from the information provided. 
A)  $16. 
B)  $15. 
C)  $14. 
D)  Cannot be determined from the information provided.

Question 8

European options can only be sold on the expiration date.

Accepted Answer

A) True 
 B)False

Question 9

The price of ABC shares is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six- month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes.

Accepted Answer

A)  200%. 
B)  150%. 
C)  250%. 
D)  300%. 
A)  200%. 
B)  150%. 
C)  250%. 
D)  300%.

Question 10

The buyer of a put expects the price of the underlying security to rise.

Accepted Answer

A) True 
 B)False

Question 11

Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a
three- month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (a) GLO shares decline to $33; and (b) GLO shares rise to $61. Calculate the profit or loss under each scenario and explain how the hedge has provided protection for Alan's position in GLO. Ignore transaction costs.

Accepted Answer

Cost of GLO = ($45)(100) = $4,500 Cost o

Question 12

For a call purchased on an organised security exchange, the strike price specifies the

Accepted Answer

A)  cost of buying one option contract based on the value of the underlying share. 
B)  intrinsic value of the offsetting put. 
C)  prevailing market price of one share. 
D)  contractual price at which each of the shares can be bought. 
A)  cost of buying one option contract based on the value of the underlying share. 
B)  intrinsic value of the offsetting put. 
C)  prevailing market price of one share. 
D)  contractual price at which each of the shares can be bought.

Question 13

Lew paid $300 to purchase a call on XYZ with a strike price of $25. What does the market price of XYZ have to be for Lew to break- even on his option investment? Ignore transaction costs and taxes.

Accepted Answer

A)  $22. 
B)  $28. 
C)  $25. 
D)  Cannot be determined from the information provided. 
A)  $22. 
B)  $28. 
C)  $25. 
D)  Cannot be determined from the information provided.

Question 14

A put option has a strike price of $32. The current price of the share is $34. The put option is said to be "in- the- money."

Accepted Answer

A) True 
 B)False

Question 15

If the ASX 200 index is at 1,061, then the cash value of an ASX 200 index option is

Accepted Answer

A)  $10,610. 
B)  $10.61. 
C)  $106,100. 
D)  $1,061. 
A)  $10,610. 
B)  $10.61. 
C)  $106,100. 
D)  $1,061.

Question 16

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

Accepted Answer

A) True 
 B)False

Question 17

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying shares sell for $24?

Accepted Answer

A)  $100. 
B)  $400. 
C)  $300. 
D)  $200. 
A)  $100. 
B)  $400. 
C)  $300. 
D)  $200.

Question 18

While share- index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

Accepted Answer

A) True 
 B)False

Question 19

To exercise a call option on the ASX 200, an investor would need to actually buy all stocks at the strike price.

Accepted Answer

A) True 
 B)False

Question 20

Writing covered calls may result in a profit to the writer even if the share price does not change.

Accepted Answer

A) True 
 B)False

Over- the- counter options are less structured than listed options and are primarily purchased by individual investors.

ABC shares are currently selling for $128. Which of the following options is "in- the- money"?

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

In nearly all cases, the purpose of a hedge is to

The maker of a put or call is the

If you expect the price of a security to decline, you could buy a call to protect your financial position.

Jason purchased a six- month put on ABC shares at a cost of $100. The strike price was $15. At what market price does Jason just break- even on this investment? Ignore transaction costs and taxes.

European options can only be sold on the expiration date.

The buyer of a put expects the price of the underlying security to rise.

For a call purchased on an organised security exchange, the strike price specifies the

Lew paid $300 to purchase a call on XYZ with a strike price of $25. What does the market price of XYZ have to be for Lew to break- even on his option investment? Ignore transaction costs and taxes.

A put option has a strike price of $32. The current price of the share is $34. The put option is said to be "in- the- money."

If the ASX 200 index is at 1,061, then the cash value of an ASX 200 index option is

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying shares sell for $24?

While share- index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

To exercise a call option on the ASX 200, an investor would need to actually buy all stocks at the strike price.

Writing covered calls may result in a profit to the writer even if the share price does not change.

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

Over- the- counter options are less structured than listed options and are primarily purchased by individual investors.

ABC shares are currently selling for $128. Which of the following options is "in- the- money"?

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

In nearly all cases, the purpose of a hedge is to

The maker of a put or call is the

If you expect the price of a security to decline, you could buy a call to protect your financial position.

Jason purchased a six- month put on ABC shares at a cost of $100. The strike price was $15. At what market price does Jason just break- even on this investment? Ignore transaction costs and taxes.

European options can only be sold on the expiration date.

The buyer of a put expects the price of the underlying security to rise.

For a call purchased on an organised security exchange, the strike price specifies the

Lew paid $300 to purchase a call on XYZ with a strike price of $25. What does the market price of XYZ have to be for Lew to break- even on his option investment? Ignore transaction costs and taxes.

A put option has a strike price of $32. The current price of the share is $34. The put option is said to be "in- the- money."

If the ASX 200 index is at 1,061, then the cash value of an ASX 200 index option is

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying shares sell for $24?

While share- index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

To exercise a call option on the ASX 200, an investor would need to actually buy all stocks at the strike price.

Writing covered calls may result in a profit to the writer even if the share price does not change.

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