Question 1

In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).

Accepted Answer

A) True 
 B)False

Question 2

A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.

Accepted Answer

A) True 
 B)False

Question 3

The time period to expiration for call options is usually for less than a year.

Accepted Answer

A) True 
 B)False

Question 4

The strike price of an option is fixed when the option is issued.

Accepted Answer

A) True 
 B)False

Question 5

If an investor constructs a covered call,

Accepted Answer

A)  there is no limit to the potential profit 
B)  risk is increased 
C)  risk is reduced 
D)  the term of the position is increased 
A)  there is no limit to the potential profit 
B)  risk is increased 
C)  risk is reduced 
D)  the term of the position is increased

Question 6

The most the investor who sells a naked stock indexoption can lose is the cost of the option.

Accepted Answer

A) True 
 B)False

Question 7

The intrinsic value of a put depends on1. the strike price2. the price of the stock3. the term on the put

Accepted Answer

A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of the above 
A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of the above

Question 8

You obtain the following information concerning a stock, a call option, and a put option   You want to purchase the stock but also want to use an option to reduce your risk of loss. 
a. Do you purchase the put or the call or do you sell the put or the call?
b. What is the cash inflow or outflow from your position?
c. What is profit or loss if the price of the stock stagnates and trades for $42 after three months?
d. What is profit or loss if the price of the stock trades for $50 or $100 after three months?
e. What is profit or loss if the price of the stock trades for $30 after three months?

Accepted Answer

To establish the protect put,

Question 9

The price of an option is generally less than the option's intrinsic value.

Accepted Answer

A) True 
 B)False

Question 10

An investor may reduce risk by simultaneously purchasing a stock and a put option.

Accepted Answer

A) True 
 B)False

Question 11

Call options, unlike warrants, may be written byindividuals.

Accepted Answer

A) True 
 B)False

Question 12

A writer of a naked call option will lose money if the price of the stock declines.

Accepted Answer

A) True 
 B)False

Question 13

The intrinsic value of an option to buy stock is

Accepted Answer

A)  its price 
B)  its strike price 
C)  the difference between the stock's price and the option's strike price 
D)  the difference between the option's strike price and the option's price 
A)  its price 
B)  its strike price 
C)  the difference between the stock's price and the option's strike price 
D)  the difference between the option's strike price and the option's price

Question 14

A call is an option to

Accepted Answer

A)  sell stock at a specified price 
B)  buy stock at a specified price 
C)  deliver stock at a specified price 
D)  deliver bonds at a specified price 
A)  sell stock at a specified price 
B)  buy stock at a specified price 
C)  deliver stock at a specified price 
D)  deliver bonds at a specified price

Question 15

The price of a call depends on1. the strike price2. the price of the underlying stock3. the term (i.e., life) of the call

Accepted Answer

A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of the above 
A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of the above

Question 16

A writer of a call option closes the position by

Accepted Answer

A)  purchasing the stock 
B)  selling the stock 
C)  purchasing the option 
D)  selling the option 
A)  purchasing the stock 
B)  selling the stock 
C)  purchasing the option 
D)  selling the option

Question 17

Since options offer potential leverage, they tend tosell for a time premium.

Accepted Answer

A) True 
 B)False

Question 18

When a call option is exercised, new stock is issued.F.23. The intrinsic value of a call option is the strike price minus the stock's price.

Accepted Answer

A) True 
 B)False

Question 19

If the price of a stock rises, the writer of a putoption profits.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following assumes higher stock prices 1. buying a stock index call2. buying a stock index put3. selling a stock index call4. selling a stock index put

Accepted Answer

A)  1 and 3 
B)  1 and 4 
C)  2 and 3 
D)  2 and 4
PROBLEMS 
A)  1 and 3 
B)  1 and 4 
C)  2 and 3 
D)  2 and 4
PROBLEMS

In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).

A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.

The time period to expiration for call options is usually for less than a year.

The strike price of an option is fixed when the option is issued.

If an investor constructs a covered call,

The most the investor who sells a naked stock indexoption can lose is the cost of the option.

The intrinsic value of a put depends on1. the strike price2. the price of the stock3. the term on the put

The price of an option is generally less than the option's intrinsic value.

An investor may reduce risk by simultaneously purchasing a stock and a put option.

Call options, unlike warrants, may be written byindividuals.

A writer of a naked call option will lose money if the price of the stock declines.

The intrinsic value of an option to buy stock is

A call is an option to

The price of a call depends on1. the strike price2. the price of the underlying stock3. the term (i.e., life) of the call

A writer of a call option closes the position by

Since options offer potential leverage, they tend tosell for a time premium.

When a call option is exercised, new stock is issued.F.23. The intrinsic value of a call option is the strike price minus the stock's price.

If the price of a stock rises, the writer of a putoption profits.

Which of the following assumes higher stock prices 1. buying a stock index call2. buying a stock index put3. selling a stock index call4. selling a stock index put

An Introduction to Investments Private

Securities Markets

The Time Value of Money Private

Financial Planning, Taxation, and the Efficiency of Financial Markets

Risk and Portfolio Management

Investment Companies: Mutual Funds Private

Closed-End Investment Companies, Real Estate Investment Trusts Reits, and Exchange-Traded Funds Etfs Private

Stock Private

The Valuation of Stock Private

Investment Returns and Aggregate Measures of Stock Markets

The Macroeconomic Environment for Investment

Behavioral Finance and Technical Analysis

The Bond Market Private

The Valuation of Fixed Income Securities

Government Securities

Convertible Bonds and Convertible Preferred Stock

Option Valuation and Strategies Private

Commodity and Financial Futures Private

Financial Planning and Investing in an Efficient Market Context

Filters

Exam 17: An Introduction to Options

In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).

A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.

The time period to expiration for call options is usually for less than a year.

The strike price of an option is fixed when the option is issued.

If an investor constructs a covered call,

The most the investor who sells a naked stock indexoption can lose is the cost of the option.

The intrinsic value of a put depends on1. the strike price2. the price of the stock3. the term on the put

The price of an option is generally less than the option's intrinsic value.

An investor may reduce risk by simultaneously purchasing a stock and a put option.

Call options, unlike warrants, may be written byindividuals.

A writer of a naked call option will lose money if the price of the stock declines.

The intrinsic value of an option to buy stock is

A call is an option to

The price of a call depends on1. the strike price2. the price of the underlying stock3. the term (i.e., life) of the call

A writer of a call option closes the position by

Since options offer potential leverage, they tend tosell for a time premium.

When a call option is exercised, new stock is issued.F.23. The intrinsic value of a call option is the strike price minus the stock's price.

If the price of a stock rises, the writer of a putoption profits.

Which of the following assumes higher stock prices 1. buying a stock index call2. buying a stock index put3. selling a stock index call4. selling a stock index put

An Introduction to Investments Private

Securities Markets

The Time Value of Money Private

Financial Planning, Taxation, and the Efficiency of Financial Markets

Risk and Portfolio Management

Investment Companies: Mutual Funds Private

Closed-End Investment Companies, Real Estate Investment Trusts Reits, and Exchange-Traded Funds Etfs Private

Stock Private

The Valuation of Stock Private

Investment Returns and Aggregate Measures of Stock Markets

The Macroeconomic Environment for Investment

Behavioral Finance and Technical Analysis

The Bond Market Private

The Valuation of Fixed Income Securities

Government Securities

Convertible Bonds and Convertible Preferred Stock

Option Valuation and Strategies Private

Commodity and Financial Futures Private

Financial Planning and Investing in an Efficient Market Context

Filters