Question 1

The owner of a regular exchange-listed call-option on the stock:

Accepted Answer

A)  has the right to buy 100 shares of the underlying stock at the exercise price 
B)  has the right to sell 100 shares of the underlying stock at the exercise price 
C)  has the obligation to buy 100 shares of the underlying stock at the exercise price 
D)  has the obligation to sell 100 shares of the underlying stock at the exercise price 
A)  has the right to buy 100 shares of the underlying stock at the exercise price 
B)  has the right to sell 100 shares of the underlying stock at the exercise price 
C)  has the obligation to buy 100 shares of the underlying stock at the exercise price 
D)  has the obligation to sell 100 shares of the underlying stock at the exercise price

Question 2

If the risk-free interest rate increases:

Accepted Answer

A)  the direct effect of it on the call option price is positive 
B)  the direct effect of it on the call option price is negative 
C)  the direct effect of it on the call option price is unknown 
D)  none of the above 
A)  the direct effect of it on the call option price is positive 
B)  the direct effect of it on the call option price is negative 
C)  the direct effect of it on the call option price is unknown 
D)  none of the above

Question 3

Options can have a value even when the stock is worthless.

Accepted Answer

A) True 
 B)False

Question 4

An increase in the exercise price results in an equal increase in the call option price.

Accepted Answer

A) True 
 B)False

Question 5

An European option gives its owner the right to exercise the option at any time before expiration.

Accepted Answer

A) True 
 B)False

Question 6

The value of a call option increases with higher volatility of the stock prices.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following investors would be happy to see the stock price rise sharply? 
I. Investor who owns the stock and a put option
II. Investor who has sold a put option and bought a call option
III. Investor who owns the stock and has sold a call option
IV. Investor who has sold a call option

Accepted Answer

A)  I and II only 
B)  III and IV only 
C)  III only 
D)  IV only 
A)  I and II only 
B)  III and IV only 
C)  III only 
D)  IV only

Question 8

Figure-1 depicts the:

Accepted Answer

A)  position diagram for the buyer of a call option 
B)  profit diagram for the buyer of a call option 
C)  position diagram for the buyer of a put option 
D)  profit diagram for the buyer of a put option 
A)  position diagram for the buyer of a call option 
B)  profit diagram for the buyer of a call option 
C)  position diagram for the buyer of a put option 
D)  profit diagram for the buyer of a put option

Question 9

Given the following data: Expiration = 6 months; Stock price = $80; exercise price = $75; call option price = $12; risk-free rate = 5% per year. Calculate the price of an equivalent put option using put-call parity:

Accepted Answer

A)  $3.07 
B)  $5.19 
C)  $11.43 
D)  none of the above 
A)  $3.07 
B)  $5.19 
C)  $11.43 
D)  none of the above

Question 10

If the stock makes a dividend payment before the expiration date then the put-call parity is:

Accepted Answer

A)  Value of call = value of put + share price - present value (PV) of dividend -PV of exercise price 
B)  Value of call = value of put - share price + PV of dividend - PV of exercise price 
C)  Value of call = value of put + share price + PV of dividend + PV of exercise price 
D)  Value of call = value of put + share price + PV of dividend - PV of exercise price 
A)  Value of call = value of put + share price - present value (PV) of dividend -PV of exercise price 
B)  Value of call = value of put - share price + PV of dividend - PV of exercise price 
C)  Value of call = value of put + share price + PV of dividend + PV of exercise price 
D)  Value of call = value of put + share price + PV of dividend - PV of exercise price

Question 11

The value of a put option at expiration is:

Accepted Answer

A)  market price of the share minus the exercise price 
B)  higher of the exercise price minus market price of the share and zero 
C)  the exercise price 
D)  none of the above 
A)  market price of the share minus the exercise price 
B)  higher of the exercise price minus market price of the share and zero 
C)  the exercise price 
D)  none of the above

Question 12

The value of a call option is negatively related to: I) Exercise price
II) Risk-free rate
III) Time to expiration

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  II and III only 
A)  I only 
B)  II only 
C)  III only 
D)  II and III only

Question 13

The Position diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is (like):

Accepted Answer

A)  the inverse of the call diagram along the put price 
B)  unrelated to the call diagram no matter what the exercise price 
C)  the mirror image of the call diagram around the exercise price 
D)  exactly the same as the call diagram for the given exercise price 
A)  the inverse of the call diagram along the put price 
B)  unrelated to the call diagram no matter what the exercise price 
C)  the mirror image of the call diagram around the exercise price 
D)  exactly the same as the call diagram for the given exercise price

Question 14

Figure-4 depicts the:

Accepted Answer

A)  position diagram for the writer (seller) of a call option 
B)  profit diagram for the writer (seller) of a call option 
C)  position diagram for the writer (seller) of a put option 
D)  profit diagram for the writer (seller) of a put option 
A)  position diagram for the writer (seller) of a call option 
B)  profit diagram for the writer (seller) of a call option 
C)  position diagram for the writer (seller) of a put option 
D)  profit diagram for the writer (seller) of a put option

Question 15

If the underlying stock pays a dividend before the expiration of the options that will have the following effect on the price of the options:
I. increase the value of the call option 
II. increase the value of the put option
III. decrease the value of the call option 
IV. decrease the value of the put option

Accepted Answer

A)  I and II only 
B)  III and IV only 
C)  I and IV only 
D)  II and III only 
A)  I and II only 
B)  III and IV only 
C)  I and IV only 
D)  II and III only

Question 16

A put option gives the owner the right:

Accepted Answer

A)  and the obligation to buy an asset at a given price 
B)  and the obligation to sell an asset at a given price 
C)  but not the obligation to buy an asset at a given price 
D)  but not the obligation to sell an asset at a given price 
A)  and the obligation to buy an asset at a given price 
B)  and the obligation to sell an asset at a given price 
C)  but not the obligation to buy an asset at a given price 
D)  but not the obligation to sell an asset at a given price

Question 17

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

Accepted Answer

A)  Above the exercise price if the stock price rises and below the exercise price if it falls 
B)  Equal to the exercise price regardless of the stock price 
C)  Equal to zero regardless of the stock price 
D)  Below the exercise price if the stock price rises and above if it falls 
A)  Above the exercise price if the stock price rises and below the exercise price if it falls 
B)  Equal to the exercise price regardless of the stock price 
C)  Equal to zero regardless of the stock price 
D)  Below the exercise price if the stock price rises and above if it falls

Question 18

The value of a put option is positively related to: 
I. Exercise price
II. Time to expiration
III. Volatility of the underlying stock price
IV. Risk-free rate

Accepted Answer

A)  I, II, and III only 
B)  II, III, and IV only 
C)  I, II, and IV only 
D)  IV only 
A)  I, II, and III only 
B)  II, III, and IV only 
C)  I, II, and IV only 
D)  IV only

Question 19

Figure-3 depicts the:

Accepted Answer

A)  position diagram for the writer (seller) of a call option 
B)  profit diagram for the writer (seller) of a call option 
C)  position diagram for the writer (seller) of a put option 
D)  profit diagram for the writer (seller) of a put option 
A)  position diagram for the writer (seller) of a call option 
B)  profit diagram for the writer (seller) of a call option 
C)  position diagram for the writer (seller) of a put option 
D)  profit diagram for the writer (seller) of a put option

Question 20

An option that can be exercised any time before expiration date is called:

Accepted Answer

A)  an European option 
B)  an American option 
C)  a call option 
D)  a put option 
A)  an European option 
B)  an American option 
C)  a call option 
D)  a put option

The owner of a regular exchange-listed call-option on the stock:

If the risk-free interest rate increases:

Options can have a value even when the stock is worthless.

An increase in the exercise price results in an equal increase in the call option price.

An European option gives its owner the right to exercise the option at any time before expiration.

The value of a call option increases with higher volatility of the stock prices.

Which of the following investors would be happy to see the stock price rise sharply? I. Investor who owns the stock and a put option II. Investor who has sold a put option and bought a call option III. Investor who owns the stock and has sold a call option IV. Investor who has sold a call option

Figure-1 depicts the:

Given the following data: Expiration = 6 months; Stock price = $80; exercise price = $75; call option price = $12; risk-free rate = 5% per year. Calculate the price of an equivalent put option using put-call parity:

If the stock makes a dividend payment before the expiration date then the put-call parity is:

The value of a put option at expiration is:

The value of a call option is negatively related to: I) Exercise price II) Risk-free rate III) Time to expiration

The Position diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is (like):

Figure-4 depicts the:

A put option gives the owner the right:

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

The value of a put option is positively related to: I. Exercise price II. Time to expiration III. Volatility of the underlying stock price IV. Risk-free rate

Figure-3 depicts the:

An option that can be exercised any time before expiration date is called:

Goals and Governance of the Firm

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Financial Analysis

Financial Planning

Filters

Exam 16: Understanding Options

The owner of a regular exchange-listed call-option on the stock:

If the risk-free interest rate increases:

Options can have a value even when the stock is worthless.

An increase in the exercise price results in an equal increase in the call option price.

An European option gives its owner the right to exercise the option at any time before expiration.

The value of a call option increases with higher volatility of the stock prices.

Which of the following investors would be happy to see the stock price rise sharply? I. Investor who owns the stock and a put option II. Investor who has sold a put option and bought a call option III. Investor who owns the stock and has sold a call option IV. Investor who has sold a call option

Figure-1 depicts the:

Given the following data: Expiration = 6 months; Stock price = $80; exercise price = $75; call option price = $12; risk-free rate = 5% per year. Calculate the price of an equivalent put option using put-call parity:

If the stock makes a dividend payment before the expiration date then the put-call parity is:

The value of a put option at expiration is:

The value of a call option is negatively related to: I) Exercise price II) Risk-free rate III) Time to expiration

The Position diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is (like):

Figure-4 depicts the:

A put option gives the owner the right:

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

The value of a put option is positively related to: I. Exercise price II. Time to expiration III. Volatility of the underlying stock price IV. Risk-free rate

Figure-3 depicts the:

An option that can be exercised any time before expiration date is called:

Goals and Governance of the Firm

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Financial Analysis

Financial Planning

Filters