Question 1

Buying a stock index option reduces systematic risk.

Accepted Answer

A) True 
 B)False  False

Question 2

A warrant is the option to buy one share of stock at $40. It expires after one year and currently sells for $10. The price of the stock is $32. What is the maximum possible profit if an investor buys one share of stock and shorts one warrant? What is the range of stock prices that yields a profit on this position?

Accepted Answer

a. and b. (This problem replicates the same position as a covered call except that it applies to a warrant instead of a call.)The maximum possible profit on the position consisting of one share purchased to one warrant sold short is the time premium, which in this case is $8 ($10 -$2). All prices of the stock greater than $22 generate a profit, and all prices greater than $30 generate the maximum $8 profit.

Question 3

There is no limit to the potential loss from buying a call option.

Accepted Answer

A) True 
 B)False  False

Question 4

The writer of a call option does not receive any dividends paid by the firm.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following assumes higher stock prices?
1. buying a stock index call
2. buying a stock index put
3. selling a stock index call
4. selling a stock index put

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 6

While individuals can write call options, they can only buy put options.

Accepted Answer

A) True 
 B)False

Question 7

The buyer of a call option wants the price of the stock to rise.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The intrinsic value of a call option is the strike price minus the stock's price.

Accepted Answer

A) True 
 B)False

Question 10

Warrants are issued by

Accepted Answer

A) individuals 
B) firms 
C) governments 
D) investors 
A) individuals 
B) firms 
C) governments 
D) investors

Question 11

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 12

If an investor is bearish, he or she should not buy a stock index call option.

Accepted Answer

A) True 
 B)False

Question 13

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 14

The intrinsic value of a put is the price of the stock minus the put's strike price.

Accepted Answer

A) True 
 B)False

Question 15

Calls are options to sell stock at a specified price within a specified time period.

Accepted Answer

A) True 
 B)False

Question 16

A covered call is constructed by buying the stock and selling the call.

Accepted Answer

A) True 
 B)False

Question 17

The intrinsic value of an option to buy stock rises as

Accepted Answer

A) the strike price increases and the price of the stock declines 
B) the strike price increases and the price of the stock rises 
C) the strike price decreases and the price of the stock declines 
D) the strike price decreases and the price of the stock rises 
A) the strike price increases and the price of the stock declines 
B) the strike price increases and the price of the stock rises 
C) the strike price decreases and the price of the stock declines 
D) the strike price decreases and the price of the stock rises

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

The time premium paid for an option to buy stock is affected by

Accepted Answer

A) the length of time to expiration 
B) the firm's credit rating 
C) the existence of a rights offering 
D) the firm's financial statements 
A) the length of time to expiration 
B) the firm's credit rating 
C) the existence of a rights offering 
D) the firm's financial statements

Question 20

Selling a covered call option is comparable to selling a stock short.

Accepted Answer

A) True 
 B)False

Buying a stock index option reduces systematic risk.

There is no limit to the potential loss from buying a call option.

The writer of a call option does not receive any dividends paid by the firm.

Which of the following assumes higher stock prices? 1. buying a stock index call 2. buying a stock index put 3. selling a stock index call 4. selling a stock index put

While individuals can write call options, they can only buy put options.

The buyer of a call option wants the price of the stock to rise.

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

The intrinsic value of a call option is the strike price minus the stock's price.

Warrants are issued by

If an investor constructs a covered call,

If an investor is bearish, he or she should not buy a stock index call option.

A call is an option to

The intrinsic value of a put is the price of the stock minus the put's strike price.

Calls are options to sell stock at a specified price within a specified time period.

A covered call is constructed by buying the stock and selling the call.

The intrinsic value of an option to buy stock rises as

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

The time premium paid for an option to buy stock is affected by

Selling a covered call option is comparable to selling a stock short.

An Introduction to Investments

Securities Markets

The Time Value of Money

Financial Planning, Taxation and the Efficiency of Financial Markets

Risk and Portfolio Management

Investment Companies: Mutual Funds

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

Stock

The Valuation of Common Stock

Investment Returns and Aggregate Measures of Stock Markets

The Macroeconomic Environment for Investment Decisions

Behavioral Finance and Technical Analysis

The Bond Market

The Valuation of Fixed-Income Securities

Government Securities

Convertible Bonds and Convertible Preferred Stock

Option Valuation and Strategies

Commodity and Financial Futures

Financial Planning and Investing in an Efficient Market Context

Filters

Exam 17: An Introduction to Options

Buying a stock index option reduces systematic risk.

There is no limit to the potential loss from buying a call option.

The writer of a call option does not receive any dividends paid by the firm.

Which of the following assumes higher stock prices? 1. buying a stock index call 2. buying a stock index put 3. selling a stock index call 4. selling a stock index put

While individuals can write call options, they can only buy put options.

The buyer of a call option wants the price of the stock to rise.

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

The intrinsic value of a call option is the strike price minus the stock's price.

Warrants are issued by

If an investor constructs a covered call,

If an investor is bearish, he or she should not buy a stock index call option.

A call is an option to

The intrinsic value of a put is the price of the stock minus the put's strike price.

Calls are options to sell stock at a specified price within a specified time period.

A covered call is constructed by buying the stock and selling the call.

The intrinsic value of an option to buy stock rises as

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

The time premium paid for an option to buy stock is affected by

Selling a covered call option is comparable to selling a stock short.

An Introduction to Investments

Securities Markets

The Time Value of Money

Financial Planning, Taxation and the Efficiency of Financial Markets

Risk and Portfolio Management

Investment Companies: Mutual Funds

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

Stock

The Valuation of Common Stock

Investment Returns and Aggregate Measures of Stock Markets

The Macroeconomic Environment for Investment Decisions

Behavioral Finance and Technical Analysis

The Bond Market

The Valuation of Fixed-Income Securities

Government Securities

Convertible Bonds and Convertible Preferred Stock

Option Valuation and Strategies

Commodity and Financial Futures

Financial Planning and Investing in an Efficient Market Context

Filters