Question 1

In the forward market both parties are required to post collateral or margin.

Accepted Answer

A) True 
 B)False

Question 2

The forward market has low liquidity relative to the futures market.

Accepted Answer

A) True 
 B)False

Question 3

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put 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 4

Forward contracts are traded over-the-counter and are generally not standardized.

Accepted Answer

A) True 
 B)False

Question 5

A stock currently sells for $150 per share. A call option on the stock with an exercise price $155 currently sells for $2.50. 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

Exhibit 20.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. $$\begin{array} { c c c } 
\text { ExercisePrice } & \text { PutPrice } & \text { Call Price } \
\hline 50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \cdots
\end{array}$$
-Refer to Exhibit 20.6. What is the value of a synthetic stock created with put and call options that expire in 6 months with an expiration price of $50?

Accepted Answer

A) $53.04 
B) $53.53 
C) $54.54 
D) $55.03 
E) $56.23 
A) $53.04 
B) $53.53 
C) $54.54 
D) $55.03 
E) $56.23

Question 7

Which of the following factors is not considered in the valuation of call and put options?

Accepted Answer

A) Current stock price 
B) Exercise price 
C) Market interest rate 
D) Volatility of underlying stock price 
E) none of the above (that is, all are factors which should be considered in the valuation of call and put options) 
A) Current stock price 
B) Exercise price 
C) Market interest rate 
D) Volatility of underlying stock price 
E) none of the above (that is, all are factors which should be considered in the valuation of call and put options)

Question 8

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

Accepted Answer

A) True 
 B)False

Question 9

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

Accepted Answer

A) -$525 
B) $1000 
C) $0 
D) -$1000 
E) $525 
A) -$525 
B) $1000 
C) $0 
D) -$1000 
E) $525

Question 10

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.

Accepted Answer

A) $25 
B) -$5 
C) $0 
D) $20 
E) $5 
A) $25 
B) -$5 
C) $0 
D) $20 
E) $5

Question 11

Exhibit 20.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 20.5. If at expiration Peppy is selling for $42.00, what is Sarah's dollar gain or loss?

Accepted Answer

A) $420 gain 
B) $420 loss 
C) $475 loss 
D) $475 gain 
E) None of the above 
A) $420 gain 
B) $420 loss 
C) $475 loss 
D) $475 gain 
E) None of the above

Question 12

Which of the following statements is a true definition of an in-the-money option?

Accepted Answer

A) A call option in which the stock price exceeds the exercise price. 
B) A call option in which the exercise price exceeds the stock price. 
C) A put option in which the stock price exceeds the exercise price. 
D) An index option in which the exercise price exceeds the stock price. 
E) A call option in which the call premium exceeds the stock price. 
A) A call option in which the stock price exceeds the exercise price. 
B) A call option in which the exercise price exceeds the stock price. 
C) A put option in which the stock price exceeds the exercise price. 
D) An index option in which the exercise price exceeds the stock price. 
E) A call option in which the call premium exceeds the stock price.

Question 13

Derivative securities can be used

Accepted Answer

A) By investors in the same way as the underlying security 
B) To modify the risk and expected return characteristics of existing investment portfolios 
C) To duplicate cash flow patterns for arbitrage opportunities 
D) All of the above 
E) None of the above 
A) By investors in the same way as the underlying security 
B) To modify the risk and expected return characteristics of existing investment portfolios 
C) To duplicate cash flow patterns for arbitrage opportunities 
D) All of the above 
E) None of the above

Question 14

The CBOE brought numerous innovations to the option market, which of the following is not such an innovation?

Accepted Answer

A) Creation of a central marketplace 
B) Creation of a non-liquid secondary option market 
C) Introduction of a Clearing Corporation 
D) Standardization of all expiration dates 
E) Standardization of all exercise prices 
A) Creation of a central marketplace 
B) Creation of a non-liquid secondary option market 
C) Introduction of a Clearing Corporation 
D) Standardization of all expiration dates 
E) Standardization of all exercise prices

Question 15

A stock currently sells for $75 per share. A put option on the stock with an exercise price $70 currently sells for $0.50. The put 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 16

Exhibit 20.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50. $$\begin{array} { c c c } 
\text { ExercisePrice } & \text { PutPrice } & \text { Call Price } \
\hline \$ 45 & \$ 1.50 & \$ 6.75 \
\$ 50 & \$ 3.75 & \$ 4.25
\end{array}$$
-Refer to Exhibit 20.7. The intrinsic value for the put option with a $50 exercise price is

Accepted Answer

A) $0.00 
B) $1.50 
C) $2.25 
D) $3.75 
E) $8.75 
A) $0.00 
B) $1.50 
C) $2.25 
D) $3.75 
E) $8.75

Question 17

Which of the following is not a factor needed to calculate the value of an American call option?

Accepted Answer

A) The price of the underlying stock. 
B) The exercise price. 
C) The price of an equivalent put option. 
D) The volatility of the underlying stock. 
E) The interest rate. 
A) The price of the underlying stock. 
B) The exercise price. 
C) The price of an equivalent put option. 
D) The volatility of the underlying stock. 
E) The interest rate.

Question 18

Assume that you purchased shares of a stock at a price of $35 per share. At this time you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

Accepted Answer

A) $25 
B) -$2 
C) $2 
D) -$25 
E) $0 
A) $25 
B) -$2 
C) $2 
D) -$25 
E) $0

Question 19

Which of the following statements is false?

Accepted Answer

A) Derivatives help shift risk from risk-adverse investors to risk-takers. 
B) Derivatives assist in forming cash prices. 
C) Derivatives provide additional information to the market. 
D) In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market. 
E) None of the above (that is, all are reasons) 
A) Derivatives help shift risk from risk-adverse investors to risk-takers. 
B) Derivatives assist in forming cash prices. 
C) Derivatives provide additional information to the market. 
D) In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market. 
E) None of the above (that is, all are reasons)

Question 20

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

Accepted Answer

A) -$1000 
B) $1000 
C) $575 
D) -$575 
E) $0 
A) -$1000 
B) $1000 
C) $575 
D) -$575 
E) $0

Exam 20: An Introduction to Derivative Markets and Securities

In the forward market both parties are required to post collateral or margin.

The forward market has low liquidity relative to the futures market.

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is

Forward contracts are traded over-the-counter and are generally not standardized.

A stock currently sells for $150 per share. A call option on the stock with an exercise price $155 currently sells for $2.50. The call option is

Which of the following factors is not considered in the valuation of call and put options?

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.

Which of the following statements is a true definition of an in-the-money option?

Derivative securities can be used

The CBOE brought numerous innovations to the option market, which of the following is not such an innovation?

A stock currently sells for $75 per share. A put option on the stock with an exercise price $70 currently sells for $0.50. The put option is

Which of the following is not a factor needed to calculate the value of an American call option?

Assume that you purchased shares of a stock at a price of $35 per share. At this time you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

Which of the following statements is false?

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

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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