Question 1

One advantage offered by options is the potential to increase your return on an investment.​

Accepted Answer

A) True 
 B)False  True

Question 2

Stock index options are settled in cash.​

Accepted Answer

A) True 
 B)False  True

Question 3

The intrinsic value of a call option is​

Accepted Answer

A)  ​the strike price plus the stock price 
B)  the strike price minus the stock price 
C)  the stock price minus the strike price 
D)  the stock price minus the call's market price​ 
A)  ​the strike price plus the stock price 
B)  the strike price minus the stock price 
C)  the stock price minus the strike price 
D)  the stock price minus the call's market price​ C

Question 4

Writers of call options anticipate earning the time premium the call demands.​

Accepted Answer

A) True 
 B)False

Question 5

An option's price tends to exceed the option's intrinsic value.​

Accepted Answer

A) True 
 B)False

Question 6

​You are given the following information concerning a stock and a call option and a put option
Price of the stock $\$ 42$
Strike price (both options) $\$ 40$
Price of the call
$\$ 6$
Price of the put
$\$ 3$
Expiration date
three months
a. What is the call's intrinsic value?
b. What is the time premium paid for the call?
c. What is the put's intrinsic value?
d. What is the time premium paid for the put?
e. If the price of the stock declines to $25, what is the maximum amount you could lose by buying the call?
f. If the price of the stock declines to $25, what is the maximum amount you profit by buying the put?
g. If after three months the price of the stock is $48, what is the profit (loss) from buying the call?
h. If after three months the price of the stock is $48, what is the profit (loss) from selling the put?

Accepted Answer

a. Intrinsic value: $42-40=$2
b. Time pr

Question 7

Naked option writing is more risky than covered call option writing.​

Accepted Answer

A) True 
 B)False

Question 8

A put is the option to sell stock at $35. The price of the stock is $34, and the price of the put is $2.​
​
a. What is the intrinsic value of the put?
​
b. What is the time premium paid for the put?
​
c. What is the percentage return on an investment in the put if at the expiration of the put the price of the stock is $31?

Accepted Answer

a. The intrinsic value: $35-34

Question 9

Over time the time premium paid for an option tends to rise.​

Accepted Answer

A) True 
 B)False

Question 10

A call is an option to sell stock at a specified price within a specified time period.​

Accepted Answer

A) True 
 B)False

Question 11

The time premium tends to reduce the potential leverage an option offers.​

Accepted Answer

A) True 
 B)False

Question 12

The buyer of a put option​

Accepted Answer

A)  ​expects prices to rise 
B)  expects prices to fall 
C)  owns the underlying stock​ 
D)  ​does not own the underlying stock 
A)  ​expects prices to rise 
B)  expects prices to fall 
C)  owns the underlying stock​ 
D)  ​does not own the underlying stock

Question 13

The primary reason for purchasing an option is the income it generates.​

Accepted Answer

A) True 
 B)False

Question 14

​Features (i.e., terms) of a call option include
1)the option's price
​2) the strike price
3) the expiration date

Accepted Answer

A) ​​1 and 2 
B) ​1 and 3 
C) ​2 and 3 
D) ​all the three 
A) ​​1 and 2 
B) ​1 and 3 
C) ​2 and 3 
D) ​all the three

Question 15

A put option is the right to​

Accepted Answer

A)  buy stock 
B)  ​receive dividends 
C)  ​sell stock 
D)  ​earn capital gains 
A)  buy stock 
B)  ​receive dividends 
C)  ​sell stock 
D)  ​earn capital gains

Question 16

An investor who writes a call option closes the position by​

Accepted Answer

A)  purchasing the stock​ 
B)  ​selling the option 
C)  letting the option expire​ 
D)  repurchasing the option 
A)  purchasing the stock​ 
B)  ​selling the option 
C)  letting the option expire​ 
D)  repurchasing the option

Question 17

At expiration an option will sell for its intrinsic value.​

Accepted Answer

A) True 
 B)False

Question 18

​A call's intrinsic value
​1) determines its maximum price
2) determines its minimum price
3) rises as the price of the stock declines
4) rises as the price of the stock rises

Accepted Answer

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

Question 19

​One advantage associated with selling (i.e., writing) a ​call option includes

Accepted Answer

A)  potential leverage​ 
B)  ​income from collecting dividends 
C)  ​income from the sale of the option 
D)  increased potential for capital gains 
A)  potential leverage​ 
B)  ​income from collecting dividends 
C)  ​income from the sale of the option 
D)  increased potential for capital gains

Question 20

An out of the money option will expire at the expiration date.​

Accepted Answer

A) True 
 B)False

Exam 28: Options: Puts and Calls

One advantage offered by options is the potential to increase your return on an investment.​

Stock index options are settled in cash.​

The intrinsic value of a call option is​

Writers of call options anticipate earning the time premium the call demands.​

An option's price tends to exceed the option's intrinsic value.​

Naked option writing is more risky than covered call option writing.​

Over time the time premium paid for an option tends to rise.​

A call is an option to sell stock at a specified price within a specified time period.​

The time premium tends to reduce the potential leverage an option offers.​

The buyer of a put option​

The primary reason for purchasing an option is the income it generates.​

​Features (i.e., terms) of a call option include 1)the option's price ​2) the strike price 3) the expiration date

A put option is the right to​

An investor who writes a call option closes the position by​

At expiration an option will sell for its intrinsic value.​

​A call's intrinsic value ​1) determines its maximum price 2) determines its minimum price 3) rises as the price of the stock declines 4) rises as the price of the stock rises

​One advantage associated with selling (i.e., writing) a ​call option includes

An out of the money option will expire at the expiration date.​

The Role of Financial Markets and Financial Intermediaries

Investment Banking

Securities Markets

The Federal Reserve

International Currency Flows

The Time Value of Money

Risk and Its Measurement

Analysis of Financial Statements

The Features of Stock

Stock Valuation

The Features of Long-Term Debt - Bonds

Bond Pricing and Yields

Preferred Stock

Convertile Securities

Investment Returns

Investment Companies

Forms of Businss and Corporate Taxation

Break-Even Analysis and the Payback Period

Leverage

Cost of Capital

Capital Budgeting

Forecasting

Cash Budgeting

Management of Current Assets

Management of Short-Term Liabilities

Intermediate-Term Debt and Leasing

Futures and Swaps

Filters

One advantage offered by options is the potential to increase your return on an investment.

Stock index options are settled in cash.

The intrinsic value of a call option is

Writers of call options anticipate earning the time premium the call demands.

An option's price tends to exceed the option's intrinsic value.

Naked option writing is more risky than covered call option writing.

Over time the time premium paid for an option tends to rise.

A call is an option to sell stock at a specified price within a specified time period.

The time premium tends to reduce the potential leverage an option offers.

The buyer of a put option

The primary reason for purchasing an option is the income it generates.

Features (i.e., terms) of a call option include 1)the option's price 2) the strike price 3) the expiration date

A put option is the right to

An investor who writes a call option closes the position by

At expiration an option will sell for its intrinsic value.

A call's intrinsic value 1) determines its maximum price 2) determines its minimum price 3) rises as the price of the stock declines 4) rises as the price of the stock rises

One advantage associated with selling (i.e., writing) a call option includes

An out of the money option will expire at the expiration date.