Question 1

Hedging with futures lets a market participant lock in a price and thereby eliminates:

Accepted Answer

A)  Price risk. 
B)  Basis risk. 
C)  Credit risk. 
D)  Liquidity risk. 
E)  None of the above. 
A)  Price risk. 
B)  Basis risk. 
C)  Credit risk. 
D)  Liquidity risk. 
E)  None of the above. A

Question 2

A major difference between options and futures is that:

Accepted Answer

A)  Options provide a symmetric risk/reward relationship. 
B)  Futures provide a symmetric risk/reward relationship. 
C)  Options provide an asymmetric risk/reward relationship. 
D)  Futures provide an asymmetric risk/reward relationship. 
E)  b and c only. 
A)  Options provide a symmetric risk/reward relationship. 
B)  Futures provide a symmetric risk/reward relationship. 
C)  Options provide an asymmetric risk/reward relationship. 
D)  Futures provide an asymmetric risk/reward relationship. 
E)  b and c only. E

Question 3

Options offer:

Accepted Answer

A)  Substantial upside return potential. 
B)  Substantial downside risk protection. 
C)  Unlimited gains and losses. 
D)  a and b only. 
E)  All of the above. 
A)  Substantial upside return potential. 
B)  Substantial downside risk protection. 
C)  Unlimited gains and losses. 
D)  a and b only. 
E)  All of the above. D

Question 4

The greater the expected volatility of the price of the underlying asset, the less an investor would be willing to pay for the option, and the more the option writer would demand for it.

Accepted Answer

A) True 
 B)False

Question 5

On the expiration date, an option's time premium:

Accepted Answer

A)  Exceeds its intrinsic value. 
B)  Equals zero. 
C)  Is positive. 
D)  Is negative. 
E)  None of the above. 
A)  Exceeds its intrinsic value. 
B)  Equals zero. 
C)  Is positive. 
D)  Is negative. 
E)  None of the above.

Question 6

The writer of a call option is said to be in a:

Accepted Answer

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

Question 7

An out-of-the-money option has no intrinsic value.

Accepted Answer

A) True 
 B)False

Question 8

The longer the time to expiration, the:

Accepted Answer

A)  Greater the option price. 
B)  Lower the option price. 
C)  Lower the option's time value. 
D)  b and c only. 
E)  None of the above. 
A)  Greater the option price. 
B)  Lower the option price. 
C)  Lower the option's time value. 
D)  b and c only. 
E)  None of the above.

Question 9

Options traded in the OTC market are known as:

Accepted Answer

A)  Standardized options. 
B)  Dealer options. 
C)  Tailor-made options. 
D)  b and c only. 
E)  Exchange-traded options. 
A)  Standardized options. 
B)  Dealer options. 
C)  Tailor-made options. 
D)  b and c only. 
E)  Exchange-traded options.

Question 10

Options may be traded either on organized exchanges, such as the Chicago Board Options Exchange, or in the:

Accepted Answer

A)  Over-the-counter market. 
B)  Interbank market. 
C)  Clearinghouse. 
D)  a and b only. 
E)  None of the above. 
A)  Over-the-counter market. 
B)  Interbank market. 
C)  Clearinghouse. 
D)  a and b only. 
E)  None of the above.

Question 11

The option price is a reflection of the option's:

Accepted Answer

A)  Premium. 
B)  Intrinsic value. 
C)  Time value. 
D)  b and c only. 
E)  None of the above. 
A)  Premium. 
B)  Intrinsic value. 
C)  Time value. 
D)  b and c only. 
E)  None of the above.

Question 12

There are no margin requirements for the buyer of an option once the option price has been paid in full.

Accepted Answer

A) True 
 B)False

Question 13

The maximum amount that an option buyer can lose is:

Accepted Answer

A)  Unlimited. 
B)  Limited to the option price. 
C)  The bid-ask spread. 
D)  The initial margin. 
E)  None of the above. 
A)  Unlimited. 
B)  Limited to the option price. 
C)  The bid-ask spread. 
D)  The initial margin. 
E)  None of the above.

Question 14

When an option grants the buyer the right to purchase the designated instrument from the writer, it is referred to as a:

Accepted Answer

A)  Call option. 
B)  Put option. 
C)  Long forwards. 
D)  Long futures. 
E)  None of the above. 
A)  Call option. 
B)  Put option. 
C)  Long forwards. 
D)  Long futures. 
E)  None of the above.

Question 15

More complex OTC options are called:

Accepted Answer

A)  Bermuda options. 
B)  Atlantic options. 
C)  Exotic options. 
D)  Plain vanilla options. 
E)  All of the above. 
A)  Bermuda options. 
B)  Atlantic options. 
C)  Exotic options. 
D)  Plain vanilla options. 
E)  All of the above.

Question 16

As the price of the underlying asset increases, the price of a:

Accepted Answer

A)  Call increase. 
B)  Put decreases. 
C)  Call decreases. 
D)  a and b only. 
E)  b and c only. 
A)  Call increase. 
B)  Put decreases. 
C)  Call decreases. 
D)  a and b only. 
E)  b and c only.

Question 17

What are the major differences between a futures contract and an options contract?

Accepted Answer

a. Legal obligation.
b. A righ

Question 18

Investors can use futures to protect against symmetric risk and options to protect against asymmetric risk.

Accepted Answer

A) True 
 B)False

Question 19

An in-the-money option is profitable when exercised immediately.

Accepted Answer

A) True 
 B)False

Question 20

When an option has intrinsic value, it is said to be:

Accepted Answer

A)  In the money. 
B)  Out-of-the money. 
C)  At-the-money. 
D)  Time dependent. 
E)  None of the above. 
A)  In the money. 
B)  Out-of-the money. 
C)  At-the-money. 
D)  Time dependent. 
E)  None of the above.

Exam 11: Introduction to Options Markets

Hedging with futures lets a market participant lock in a price and thereby eliminates:

A major difference between options and futures is that:

Options offer:

The greater the expected volatility of the price of the underlying asset, the less an investor would be willing to pay for the option, and the more the option writer would demand for it.

On the expiration date, an option's time premium:

The writer of a call option is said to be in a:

An out-of-the-money option has no intrinsic value.

The longer the time to expiration, the:

Options traded in the OTC market are known as:

Options may be traded either on organized exchanges, such as the Chicago Board Options Exchange, or in the:

The option price is a reflection of the option's:

There are no margin requirements for the buyer of an option once the option price has been paid in full.

The maximum amount that an option buyer can lose is:

When an option grants the buyer the right to purchase the designated instrument from the writer, it is referred to as a:

More complex OTC options are called:

As the price of the underlying asset increases, the price of a:

What are the major differences between a futures contract and an options contract?

Investors can use futures to protect against symmetric risk and options to protect against asymmetric risk.

An in-the-money option is profitable when exercised immediately.

When an option has intrinsic value, it is said to be:

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 the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

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