Question 1

Of the five factors that influence the price of an option:

Accepted Answer

A)  The strike price must be estimated. 
B)  The stock price is observed. 
C)  The standard deviation must be estimated. 
D)  b and c only. 
E)  All of the above. 
A)  The strike price must be estimated. 
B)  The stock price is observed. 
C)  The standard deviation must be estimated. 
D)  b and c only. 
E)  All of the above. D

Question 2

In the U.S., options are traded on the:

Accepted Answer

A)  Philadelphia Stock Exchange. 
B)  CBOE. 
C)  American Stock Exchange. 
D)  NYSE. 
E)  All of the above. 
A)  Philadelphia Stock Exchange. 
B)  CBOE. 
C)  American Stock Exchange. 
D)  NYSE. 
E)  All of the above. E

Question 3

The most important use of options is to alter return distributions.

Accepted Answer

A) True 
 B)False  True

Question 4

If an investor wants to purchase a stock at a price less than the prevailing market price:

Accepted Answer

A)  Place a limit order. 
B)  Write a put option with a strike price near the desired price. 
C)  Sell a call option. 
D)  a and b only. 
E)  None of the above. 
A)  Place a limit order. 
B)  Write a put option with a strike price near the desired price. 
C)  Sell a call option. 
D)  a and b only. 
E)  None of the above.

Question 5

Hedging with options by taking a position in the underlying stock allows the investor to lock in:

Accepted Answer

A)  The riskless arbitrage profit. 
B)  The abnormal return. 
C)  The riskfree rate. 
D)  Price risk. 
E)  None of the above. 
A)  The riskless arbitrage profit. 
B)  The abnormal return. 
C)  The riskfree rate. 
D)  Price risk. 
E)  None of the above.

Question 6

Option strategies that do not involve an offsetting or risk-reducing position in either another option or the underlying common stock is called:

Accepted Answer

A)  Naked strategies. 
B)  Covered strategies. 
C)  Hedge strategies. 
D)  Active strategies. 
E)  Passive strategies. 
A)  Naked strategies. 
B)  Covered strategies. 
C)  Hedge strategies. 
D)  Active strategies. 
E)  Passive strategies.

Question 7

Which of the following is false?

Accepted Answer

A)  Warrants are attached to a bond or preferred stock. 
B)  Warrants may be detached from the host security that they were attached to. 
C)  Warrants can be traded separately on major national exchanges. 
D)  Warrants have a value. 
E)  None of the above. 
A)  Warrants are attached to a bond or preferred stock. 
B)  Warrants may be detached from the host security that they were attached to. 
C)  Warrants can be traded separately on major national exchanges. 
D)  Warrants have a value. 
E)  None of the above.

Question 8

A covered or hedge strategy involves:

Accepted Answer

A)  A position in an option. 
B)  Funds invested in a riskfree security. 
C)  A position in the underlying stock. 
D)  a and c only. 
E)  All of the above. 
A)  A position in an option. 
B)  Funds invested in a riskfree security. 
C)  A position in the underlying stock. 
D)  a and c only. 
E)  All of the above.

Question 9

To take advantage of an anticipated increase in the stock price while, at the same time, limiting the maximum loss to the option, the investor will use a:

Accepted Answer

A)  Short call strategy. 
B)  Long call strategy. 
C)  Cash-secured put writing strategy. 
D)  Long-call paper buying strategy. 
E)  None of the above. 
A)  Short call strategy. 
B)  Long call strategy. 
C)  Cash-secured put writing strategy. 
D)  Long-call paper buying strategy. 
E)  None of the above.

Question 10

Explain how a protective put buying strategy can protect the value of a stock in a portfolio against the risk of a decline in market value.

Accepted Answer

a. Long put position.
b. Long

Question 11

Strategies that combine two or more options on the same underlying stock, include:

Accepted Answer

A)  Vertical spreads. 
B)  Butterfly spreads. 
C)  Diagonal spreads. 
D)  Straddles. 
E)  All of the above. 
A)  Vertical spreads. 
B)  Butterfly spreads. 
C)  Diagonal spreads. 
D)  Straddles. 
E)  All of the above.

Question 12

Compare and contrast a warrant and an exchange-traded call option.

Accepted Answer

a. Trading places.
b. Issuers.

Question 13

A warrant, which gives the holder the right but not the obligation to buy a designated number of shares at a specified price before a set date, is equivalent to:

Accepted Answer

A)  A call option. 
B)  A put option. 
C)  A straddle. 
D)  A spread. 
E)  None of the above. 
A)  A call option. 
B)  A put option. 
C)  A straddle. 
D)  A spread. 
E)  None of the above.

Question 14

The Black-Scholes model is based on several restrictive assumptions, including:

Accepted Answer

A)  Constant variance of the stock price. 
B)  Stock prices are continuous and smooth. 
C)  Zero taxes and transactions costs. 
D)  Equal borrowing and lending rates. 
E)  All of the above. 
A)  Constant variance of the stock price. 
B)  Stock prices are continuous and smooth. 
C)  Zero taxes and transactions costs. 
D)  Equal borrowing and lending rates. 
E)  All of the above.

Question 15

The most straightforward option strategy for benefiting from an expected decrease in the price of some common stock while avoiding the unfavorable consequences should the price rise is to follow a:

Accepted Answer

A)  Long put strategy. 
B)  Short put strategy. 
C)  Long call strategy. 
D)  Short call strategy. 
E)  None of the above. 
A)  Long put strategy. 
B)  Short put strategy. 
C)  Long call strategy. 
D)  Short call strategy. 
E)  None of the above.

Question 16

The binomial option pricing model can handle American call options.

Accepted Answer

A) True 
 B)False

Question 17

Investors use the options market to generate abnormal returns.

Accepted Answer

A) True 
 B)False

Question 18

To protect the value of a stock held in a portfolio against the risk of a decline in the market value, an investor would follow:

Accepted Answer

A)  A covered call writing strategy. 
B)  A protective put buying strategy. 
C)  A butterfly spread. 
D)  A short call strategy. 
E)  None of the above. 
A)  A covered call writing strategy. 
B)  A protective put buying strategy. 
C)  A butterfly spread. 
D)  A short call strategy. 
E)  None of the above.

Question 19

Which of the following statement is most correct?

Accepted Answer

A)  Exchange-traded stock options are for one unit of the designated common stock. 
B)  Options have standardized expiration dates. 
C)  The longest time for an option on a stock is six months. 
D)  b and c only. 
E)  All of the above. 
A)  Exchange-traded stock options are for one unit of the designated common stock. 
B)  Options have standardized expiration dates. 
C)  The longest time for an option on a stock is six months. 
D)  b and c only. 
E)  All of the above.

Question 20

LEAPS are:

Accepted Answer

A)  Short-term options. 
B)  Long-term options. 
C)  Nearby options. 
D)  Perpetual options. 
E)  None of the above. 
A)  Short-term options. 
B)  Long-term options. 
C)  Nearby options. 
D)  Perpetual options. 
E)  None of the above.

Exam 15: Stock Options Market

Of the five factors that influence the price of an option:

In the U.S., options are traded on the:

The most important use of options is to alter return distributions.

If an investor wants to purchase a stock at a price less than the prevailing market price:

Hedging with options by taking a position in the underlying stock allows the investor to lock in:

Option strategies that do not involve an offsetting or risk-reducing position in either another option or the underlying common stock is called:

Which of the following is false?

A covered or hedge strategy involves:

To take advantage of an anticipated increase in the stock price while, at the same time, limiting the maximum loss to the option, the investor will use a:

Explain how a protective put buying strategy can protect the value of a stock in a portfolio against the risk of a decline in market value.

Strategies that combine two or more options on the same underlying stock, include:

Compare and contrast a warrant and an exchange-traded call option.

A warrant, which gives the holder the right but not the obligation to buy a designated number of shares at a specified price before a set date, is equivalent to:

The Black-Scholes model is based on several restrictive assumptions, including:

The most straightforward option strategy for benefiting from an expected decrease in the price of some common stock while avoiding the unfavorable consequences should the price rise is to follow a:

The binomial option pricing model can handle American call options.

Investors use the options market to generate abnormal returns.

To protect the value of a stock held in a portfolio against the risk of a decline in the market value, an investor would follow:

Which of the following statement is most correct?

LEAPS are:

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: I

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Introduction to the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

The Market for Stock Index Products and Other Equity Derivatives

The Theory and Structure of Interest Rates

Valuation of Debt Contracts and Their Price Volatility Characteristics

The Term Structure of Interest Rates

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

Filters