Question 1

The option premium is the price the call buyer will pay to the option seller if the option is exercised.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 20.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The current value of the S&P 500 stock index is 1178.
-Refer to Exhibit 20.1. Calculate the return on a cash investment in the S&P 500 stock index if the ending index value is 1170 over the same time period.

Accepted Answer

A) 1.87% 
B) -0.68% 
C) -14.90% 
D) 10.36% 
E) None of the above 
A) 1.87% 
B) -0.68% 
C) -14.90% 
D) 10.36% 
E) None of the above

Question 3

Holding a put option and the underlying security at the same time is an example of

Accepted Answer

A) Collar 
B) Straddle 
C) Income generation 
D) Portfolio insurance 
E) None of the above 
A) Collar 
B) Straddle 
C) Income generation 
D) Portfolio insurance 
E) None of the above

Question 4

A forward contract gives its holder the option to conduct a transaction involving another security or commodity.

Accepted Answer

A) True 
 B)False

Question 5

A stock currently sells for $75 per share. A call option on the stock with an exercise price $70 currently sells for $5.50. The call option is

Accepted Answer

A) At-the-money. 
B) In-the-money. 
C) Out-of-the-money. 
D) At breakeven. 
E) None of the above. 
A) At-the-money. 
B) In-the-money. 
C) Out-of-the-money. 
D) At breakeven. 
E) None of the above.

Question 6

You own a call option and put option that both have the same exercise price of $50 and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.

Accepted Answer

A) $1.00 
B) $2.00 
C) $3.00 
D) $4.00 
E) $5.00 
A) $1.00 
B) $2.00 
C) $3.00 
D) $4.00 
E) $5.00

Question 7

The value of a put option at expiration is

Accepted Answer

A) Max [0, S(T) - X] 
B) Max [0, X - S(T)] 
C) Min [0, S(T) - X] 
D) Min [0, X - S(T)] 
E) X 
A) Max [0, S(T) - X] 
B) Max [0, X - S(T)] 
C) Min [0, S(T) - X] 
D) Min [0, X - S(T)] 
E) X

Question 8

A forward contract is similar to an option contract because they both

Accepted Answer

A) Can provide insurance against the price of the underlying stock 
B) Are paid for up front in the form of premiums 
C) Are paid for at the end of the contract in the form of premiums 
D) Require a future settlement payment 
E) None of the above 
A) Can provide insurance against the price of the underlying stock 
B) Are paid for up front in the form of premiums 
C) Are paid for at the end of the contract in the form of premiums 
D) Require a future settlement payment 
E) None of the above

Question 9

An advantage of a forward contract over a futures contract is that

Accepted Answer

A) The terms of the contract are flexible 
B) It is more liquid 
C) It trades through a centralized market exchange 
D) It is easier to unwind due to contract homogeneity 
E) None of the above 
A) The terms of the contract are flexible 
B) It is more liquid 
C) It trades through a centralized market exchange 
D) It is easier to unwind due to contract homogeneity 
E) None of the above

Question 10

Exhibit 20.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share:
(1)Buy 500 shares, and
(2)Buy six month call options with an exercise price of 45 for $3.25 premium.
-Refer to Exhibit 20.4. Assuming no commissions or taxes what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?

Accepted Answer

A) 161.54% gain 
B) 53.85% gain 
C) 161.54% loss 
D) 11.11% gain 
E) 53.85% loss 
A) 161.54% gain 
B) 53.85% gain 
C) 161.54% loss 
D) 11.11% gain 
E) 53.85% loss

Question 11

A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.

Accepted Answer

A) True 
 B)False

Question 12

A call option is in the money if the current market price is above the strike price.

Accepted Answer

A) True 
 B)False

Question 13

Assume that you have purchased a call option with a strike price $60 for $5. At the same time you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

Accepted Answer

A) $10 
B) -$4 
C) $5 
D) $6 
E) $15 
A) $10 
B) -$4 
C) $5 
D) $6 
E) $15

Question 14

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

Accepted Answer

A) True 
 B)False

Question 15

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

Accepted Answer

A) Max [0, V - X] 
B) Max [0, X F- V] 
C) Min [0, V - X] 
D) Min [0, X - V] 
E) Max [0, V > X] 
A) Max [0, V - X] 
B) Max [0, X F- V] 
C) Min [0, V - X] 
D) Min [0, X - V] 
E) Max [0, V > X]

Question 16

The initial value of a future contract is the price agreed upon in the contract.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is consistent with put-call-spot parity?

Accepted Answer

A) S + C = P + X/(1 + RFR) 
B) S + P = C + X/(1 + RFR) 
C) S -C = P + X/(1 + RFR) 
D) S- P = C + X/(1 + RFR) 
E) S = P - C + X/(1 + RFR) 
A) S + C = P + X/(1 + RFR) 
B) S + P = C + X/(1 + RFR) 
C) S -C = P + X/(1 + RFR) 
D) S- P = C + X/(1 + RFR) 
E) S = P - C + X/(1 + RFR)

Question 18

Exhibit 20.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10%.
-Refer to Exhibit 20.2. Calculate the current value of one contract.

Accepted Answer

A) $100,000 
B) $103,600.5 
C) $103,187.5 
D) $102,306.3 
E) $104,293.5 
A) $100,000 
B) $103,600.5 
C) $103,187.5 
D) $102,306.3 
E) $104,293.5

Question 19

An expiration date payoff and profit diagram for forward positions illustrates

Accepted Answer

A) Gains and losses are usually small 
B) The payoffs to both long and short positions in the forward contract are asymmetrical around the contract price 
C) Forward contracts are zero-sum games 
D) Long positions benefit from falling prices 
E) None of the above 
A) Gains and losses are usually small 
B) The payoffs to both long and short positions in the forward contract are asymmetrical around the contract price 
C) Forward contracts are zero-sum games 
D) Long positions benefit from falling prices 
E) None of the above

Question 20

Futures differ from forward contracts because

Accepted Answer

A) Futures have more liquidity risk. 
B) Futures have more credit risk. 
C) Futures have more maturity risk. 
D) All of the above 
E) None of the above 
A) Futures have more liquidity risk. 
B) Futures have more credit risk. 
C) Futures have more maturity risk. 
D) All of the above 
E) None of the above

Exam 20: An Introduction to Derivative Markets and Securities

The option premium is the price the call buyer will pay to the option seller if the option is exercised.

Holding a put option and the underlying security at the same time is an example of

A forward contract gives its holder the option to conduct a transaction involving another security or commodity.

A stock currently sells for $75 per share. A call option on the stock with an exercise price $70 currently sells for $5.50. The call option is

You own a call option and put option that both have the same exercise price of $50 and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.

The value of a put option at expiration is

A forward contract is similar to an option contract because they both

An advantage of a forward contract over a futures contract is that

A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.

A call option is in the money if the current market price is above the strike price.

Assume that you have purchased a call option with a strike price $60 for $5. At the same time you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

The initial value of a future contract is the price agreed upon in the contract.

Which of the following is consistent with put-call-spot parity?

An expiration date payoff and profit diagram for forward positions illustrates

Futures differ from forward contracts because

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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