Question 1

The value of a put option at expiration is

Accepted Answer

A)  Max [0, S(T) - X] 
B)  Max [0, X - S(T)] 
C)  Min [0, S(T) - X] 
D)  Min [0, X - S(T)] 
E)  X 
A)  Max [0, S(T) - X] 
B)  Max [0, X - S(T)] 
C)  Min [0, S(T) - X] 
D)  Min [0, X - S(T)] 
E)  X

Question 2

Derivative instruments exist because

Accepted Answer

A)  They help shift risk from risk-averse investors to risk-takers. 
B)  They help in forming prices. 
C)  They have lower investment costs. 
D)  Choices a and b 
E)  All of the above 
A)  They help shift risk from risk-averse investors to risk-takers. 
B)  They help in forming prices. 
C)  They have lower investment costs. 
D)  Choices a and b 
E)  All of the above

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

A stock currently trades for $25.January call options with a strike price of $30 sell for $6.The appropriate risk free bond has a price of $30.Calculate the price of the January put option.

Accepted Answer

A)  $11 
B)  $24 
C)  $19 
D)  $30 
E)  $25 
A)  $11 
B)  $24 
C)  $19 
D)  $30 
E)  $25

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Futures contracts are similar to forward contracts in that they both

Accepted Answer

A)  Have volatile price movements and strong interest from buyers and sellers. 
B)  Give the holder the option to make a transaction in the future. 
C)  Have similar liquidity. 
D)  Have similar credit risk. 
E)  None of the above. 
A)  Have volatile price movements and strong interest from buyers and sellers. 
B)  Give the holder the option to make a transaction in the future. 
C)  Have similar liquidity. 
D)  Have similar credit risk. 
E)  None of the above.

Question 7

Consider a stock that is currently trading at $65.Calculate the intrinsic value for a put option that has an exercise price of $55.

Accepted Answer

A)  $10 
B)  $50 
C)  $55 
D)  -$10 
E)  $0 
A)  $10 
B)  $50 
C)  $55 
D)  -$10 
E)  $0

Question 8

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%.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-A stock currently trades for $63.Call options with a strike price of $62 sell for $4.00 and expire in 6 months.If the risk-free rate is 4% what should the price of a put option with an exercise price of $62 be worth?

Accepted Answer

A)  $0.62 
B)  $0.98 
C)  $1.80 
D)  $3.00 
E)  $5.80 
A)  $0.62 
B)  $0.98 
C)  $1.80 
D)  $3.00 
E)  $5.80

Question 9

The cost of carry includes all of the following except

Accepted Answer

A)  Storage costs. 
B)  Insurance. 
C)  Current price. 
D)  Financing costs. 
E)  Risk free rate. 
A)  Storage costs. 
B)  Insurance. 
C)  Current price. 
D)  Financing costs. 
E)  Risk free rate.

Question 10

An option to sell an asset is referred to as a call,whereas an option to buy an asset is called a put.

Accepted Answer

A) True 
 B)False

Question 11

Consider a stock that is currently trading at $20.Calculate the intrinsic value for a put option that has an exercise price of $35.

Accepted Answer

A)  $15 
B)  $55 
C)  $35 
D)  -$15 
E)  $0 
A)  $15 
B)  $55 
C)  $35 
D)  -$15 
E)  $0

Question 12

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 13

A forward contract is similar to an option contract because they both

Accepted Answer

A)  Can provide insurance against the price of the underlying stock 
B)  Are paid for up front in the form of premiums 
C)  Are paid for at the end of the contract in the form of premiums 
D)  Require a future settlement payment 
E)  None of the above 
A)  Can provide insurance against the price of the underlying stock 
B)  Are paid for up front in the form of premiums 
C)  Are paid for at the end of the contract in the form of premiums 
D)  Require a future settlement payment 
E)  None of the above

Question 14

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%.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-Refer to Exhibit 20.6.What should the price be of a call option that expires 6 month from today with an exercise price of $55?

Accepted Answer

A)  $1.33 
B)  $3.08 
C)  $4.58 
D)  $6.07 
E)  $6.33 
A)  $1.33 
B)  $3.08 
C)  $4.58 
D)  $6.07 
E)  $6.33

Question 15

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

Question 16

In the valuation of an option contract,the following statements apply except

Accepted Answer

A)  The value of an option increases with its maturity. 
B)  There is a negative relationship between the market interest rate and the value of a call option. 
C)  The value of a call option is negatively related to its exercise price. 
D)  The value of a call option is positively related to the volatility of the underlying asset. 
E)  The value of a call option is positively related to the price of the underlying stock. 
A)  The value of an option increases with its maturity. 
B)  There is a negative relationship between the market interest rate and the value of a call option. 
C)  The value of a call option is negatively related to its exercise price. 
D)  The value of a call option is positively related to the volatility of the underlying asset. 
E)  The value of a call option is positively related to the price of the underlying stock.

Question 17

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 18

Exhibit 20.2
Use the Information Below for the Following Problem(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10%.
-Refer to Exhibit 20.2.Calculate the initial margin deposit.

Accepted Answer

A)  $10,000 
B)  $10,360.50 
C)  $10,318.75 
D)  $10,230.63 
E)  $10,429.35 
A)  $10,000 
B)  $10,360.50 
C)  $10,318.75 
D)  $10,230.63 
E)  $10,429.35

Question 19

Exhibit 20.2
Use the Information Below for the Following Problem(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10%.
-Refer to Exhibit 20.2.Calculate the current value of one contract.

Accepted Answer

A)  $100,000 
B)  $103,600.5 
C)  $103,187.5 
D)  $102,306.3 
E)  $104,293.5 
A)  $100,000 
B)  $103,600.5 
C)  $103,187.5 
D)  $102,306.3 
E)  $104,293.5

Question 20

A stock currently trades for $115.January call options with a strike price of $100 sell for $16,and January put options a strike price of $100 sell for $5.Estimate the price of a risk free bond.

Accepted Answer

A)  $120 
B)  $15 
C)  $105 
D)  $116 
E)  $104 
A)  $120 
B)  $15 
C)  $105 
D)  $116 
E)  $104

Exam 20: An Introduction to Derivative Markets and Securities

The value of a put option at expiration is

Derivative instruments exist because

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

A stock currently trades for $25.January call options with a strike price of $30 sell for $6.The appropriate risk free bond has a price of $30.Calculate the price of the January put option.

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

Futures contracts are similar to forward contracts in that they both

Consider a stock that is currently trading at $65.Calculate the intrinsic value for a put option that has an exercise price of $55.

The cost of carry includes all of the following except

An option to sell an asset is referred to as a call,whereas an option to buy an asset is called a put.

Consider a stock that is currently trading at $20.Calculate the intrinsic value for a put option that has an exercise price of $35.

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

A forward contract is similar to an option contract because they both

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.

In the valuation of an option contract,the following statements apply except

Derivative securities can be used

A stock currently trades for $115.January call options with a strike price of $100 sell for $16,and January put options a strike price of $100 sell for $5.Estimate the price of a risk free bond.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

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

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

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

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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