Question 1

For a given call option price, which of the following statements is correct?

Accepted Answer

A) The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option. 
B) The closer the strike price is to the current price of the underlying asset, the larger is the time value of the option. 
C) As the strike price approaches the price of the underlying asset, the time value of the option approaches zero. 
D) As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases. 
A) The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option. 
B) The closer the strike price is to the current price of the underlying asset, the larger is the time value of the option. 
C) As the strike price approaches the price of the underlying asset, the time value of the option approaches zero. 
D) As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases. B

Question 2

With a put option, the option holder:

Accepted Answer

A) Has the right to buy the asset. 
B) Can buy or sell the asset, it is their option. 
C) Has the right to sell the asset. 
D) Can buy the asset but only on the date specified. 
A) Has the right to buy the asset. 
B) Can buy or sell the asset, it is their option. 
C) Has the right to sell the asset. 
D) Can buy the asset but only on the date specified. C

Question 3

If the price of an underlying asset has a standard deviation of zero:

Accepted Answer

A) Options for this asset would likely not exist. 
B) Option for this asset would be highly valued. 
C) The intrinsic value of options for this asset would equal the asset's price. 
D) Options for this asset would have a time value of the option equal to the price of the asset. 
A) Options for this asset would likely not exist. 
B) Option for this asset would be highly valued. 
C) The intrinsic value of options for this asset would equal the asset's price. 
D) Options for this asset would have a time value of the option equal to the price of the asset. A

Question 4

Assume we have a stock currently worth $100.We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $100.If the stock can rise or fall by $20 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of the option?

Accepted Answer

A) $20 
B) $0 
C) $10 
D) $100 
A) $20 
B) $0 
C) $10 
D) $100

Question 5

Explain why a forward contract may actually carry more risk than a futures contract.

Accepted Answer

A forward contract is a private agreemen

Question 6

The time value of the option can best be defined as:

Accepted Answer

A) The commission earned by a broker. 
B) The fee earned for the potential benefits from buying the option. 
C) The service fee charged by the SEC for regulating the option market. 
D) The fee paid for the potential benefits from buying an option. 
A) The commission earned by a broker. 
B) The fee earned for the potential benefits from buying the option. 
C) The service fee charged by the SEC for regulating the option market. 
D) The fee paid for the potential benefits from buying an option.

Question 7

As the time of settlement gets closer:

Accepted Answer

A) The price of the futures contract will diverge from the price of the underlying asset. 
B) The price of the futures contract will always be above the price of the underlying asset. 
C) The price of the underlying asset and the future's price will show no correlation at all. 
D) The price of the futures contract will move in lockstep with the price of the underlying asset. 
A) The price of the futures contract will diverge from the price of the underlying asset. 
B) The price of the futures contract will always be above the price of the underlying asset. 
C) The price of the underlying asset and the future's price will show no correlation at all. 
D) The price of the futures contract will move in lockstep with the price of the underlying asset.

Question 8

If a futures contract for U.S.Treasury bonds increases by "12" in the financial page listings, the value of the contract increased by:

Accepted Answer

A) $120.00 
B) $1200.00 
C) $375.00 
D) $240.00 
A) $120.00 
B) $1200.00 
C) $375.00 
D) $240.00

Question 9

Suppose you purchase a call option to purchase General Motors common stock at $80 per share in March.The current price of GM stock is $83 and the time value of the option is $5.What is the intrinsic value of the option? As the expiration date approaches, what will happen to the size of the time value of the option?

Accepted Answer

The intrinsic value of an option is equa

Question 10

If market participants believe the corn crop is likely to be unusually large:

Accepted Answer

A) The market price of corn is likely to be below the futures price of corn. 
B) The market price of corn is likely to be above the futures price of corn. 
C) It would be impossible to find someone to take the short position in a futures contract. 
D) It will be impossible to find someone to take the long position in a futures contract. 
A) The market price of corn is likely to be below the futures price of corn. 
B) The market price of corn is likely to be above the futures price of corn. 
C) It would be impossible to find someone to take the short position in a futures contract. 
D) It will be impossible to find someone to take the long position in a futures contract.

Question 11

An option's value will never be less than zero because:

Accepted Answer

A) The intrinsic value is always less than zero. 
B) The option seller is required to make up any shortfall faced by the option buyer. 
C) An option holder will never make an additional payment to exercise the option. 
D) The time value of the option is always less than zero. 
A) The intrinsic value is always less than zero. 
B) The option seller is required to make up any shortfall faced by the option buyer. 
C) An option holder will never make an additional payment to exercise the option. 
D) The time value of the option is always less than zero.

Question 12

The two parts that make up an option's price are:

Accepted Answer

A) Extrinsic value and the time value of the option. 
B) The commission and the time value of the option. 
C) The intrinsic value and the time value of the option. 
D) The price of the underlying asset and the time value of the option. 
A) Extrinsic value and the time value of the option. 
B) The commission and the time value of the option. 
C) The intrinsic value and the time value of the option. 
D) The price of the underlying asset and the time value of the option.

Question 13

An individual who speculates by selling a call option wants to bet that:

Accepted Answer

A) The market price of the underlying asset will rise. 
B) The option expires worthless. 
C) The price of the underlying asset will not rise. 
D) The price of the underlying asset will not fall. 
A) The market price of the underlying asset will rise. 
B) The option expires worthless. 
C) The price of the underlying asset will not rise. 
D) The price of the underlying asset will not fall.

Question 14

Comparing an option to a futures contract it would be correct to say:

Accepted Answer

A) The risk involved in each is equal. 
B) A futures contract carries more risk than the option contract. 
C) An option contract carries more risk than the futures contract. 
D) Neither involves risk; they are tools to eliminate risk. 
A) The risk involved in each is equal. 
B) A futures contract carries more risk than the option contract. 
C) An option contract carries more risk than the futures contract. 
D) Neither involves risk; they are tools to eliminate risk.

Question 15

Why does the time value of the option tend to vary directly with the time to expiration?

Accepted Answer

Prior to expiration there is always the

Question 16

Standardization of derivative contracts:

Accepted Answer

A) Result in increased risk for the parties involved. 
B) Makes them more difficult to understand and therefore leads to increased misuse. 
C) Makes the premiums involved with these contracts increase. 
D) Leads to greater liquidity and lower risk. 
A) Result in increased risk for the parties involved. 
B) Makes them more difficult to understand and therefore leads to increased misuse. 
C) Makes the premiums involved with these contracts increase. 
D) Leads to greater liquidity and lower risk.

Question 17

Why do government debt managers often use interest-rate swaps?

Accepted Answer

Government debt managers find that often

Question 18

Forward contracts are:

Accepted Answer

A) An agreement between more than two parties. 
B) Contracts usually involving the exchange of a commodity or financial instrument. 
C) Always standardized. 
D) Easily resold. 
A) An agreement between more than two parties. 
B) Contracts usually involving the exchange of a commodity or financial instrument. 
C) Always standardized. 
D) Easily resold.

Question 19

With a call option, the option holder:

Accepted Answer

A) Has the right to sell the asset. 
B) Has the right to buy the asset. 
C) Can buy or sell, it is their option. 
D) Can buy the asset but only on the date specified. 
A) Has the right to sell the asset. 
B) Has the right to buy the asset. 
C) Can buy or sell, it is their option. 
D) Can buy the asset but only on the date specified.

Question 20

Speculators differ from hedgers in the sense that:

Accepted Answer

A) Speculators do not like risk. 
B) Hedgers seek to transfer risk. 
C) Speculators seek to transfer risk. 
D) Speculators are hedgers, there isn't any difference. 
A) Speculators do not like risk. 
B) Hedgers seek to transfer risk. 
C) Speculators seek to transfer risk. 
D) Speculators are hedgers, there isn't any difference.

Exam 9: Derivatives: Futures, Options, and Swaps

For a given call option price, which of the following statements is correct?

With a put option, the option holder:

If the price of an underlying asset has a standard deviation of zero:

Explain why a forward contract may actually carry more risk than a futures contract.

The time value of the option can best be defined as:

As the time of settlement gets closer:

If a futures contract for U.S.Treasury bonds increases by "12" in the financial page listings, the value of the contract increased by:

If market participants believe the corn crop is likely to be unusually large:

An option's value will never be less than zero because:

The two parts that make up an option's price are:

An individual who speculates by selling a call option wants to bet that:

Comparing an option to a futures contract it would be correct to say:

Why does the time value of the option tend to vary directly with the time to expiration?

Standardization of derivative contracts:

Why do government debt managers often use interest-rate swaps?

Forward contracts are:

With a call option, the option holder:

Speculators differ from hedgers in the sense that:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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