Question 1

Because of arbitrage,the price of an option

Accepted Answer

A)  exceeds its intrinsic value 
B)  is less than its intrinsic value 
C)  cannot be less than its intrinsic value 
D)  cannot be greater than its intrinsic value 
A)  exceeds its intrinsic value 
B)  is less than its intrinsic value 
C)  cannot be less than its intrinsic value 
D)  cannot be greater than its intrinsic value C

Question 2

A put and a call have the following terms:
   The price of the stock is currently $55.The price of the call and put are,respectively,$9 and $1.What will be the profit from buying the call or buying the put if,after six months,the price of the stock is $40,$50,or $60?

Accepted Answer

Profit on the purchase of the call is the intrinsic value (at expiration)minus the purchase price.
Profit on the purchase of the put is the intrinsic value (at expiration)minus the purchase price.

Question 3

A call option is similar to a warrant except

Accepted Answer

A)  the strike price is fixed 
B)  it may be issued by individual investors 
C)  it is not marketable (saleable) 
D)  it receives dividend payments 
A)  the strike price is fixed 
B)  it may be issued by individual investors 
C)  it is not marketable (saleable) 
D)  it receives dividend payments B

Question 4

The most the investor who sells a naked stock index option can lose is the cost of the option.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Writing covered call options is more risky than writing naked call options.

Accepted Answer

A) True 
 B)False

Question 7

The price of an option is generally less than the option's intrinsic value.

Accepted Answer

A) True 
 B)False

Question 8

Stock index options
1)permit the investor to short the market instead of individual stocks
2)require delivery of an index of stocks
3)limit the buyer's potential loss to the cost of the option

Accepted Answer

A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of these choices 
A)  1 and 2 
B)  1 and 3 
C)  2 and 3 
D)  all of these choices

Question 9

The value of a right is independent of the price of the stock that the right is an option to buy.

Accepted Answer

A) True 
 B)False

Question 10

Arbitrage determines the maximum price of an option.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is premised on lower stock prices?

Accepted Answer

A)  buying a stock index call 
B)  buying a stock index put 
C)  buying a stock and selling a call 
D)  buying a stock and selling a put 
A)  buying a stock index call 
B)  buying a stock index put 
C)  buying a stock and selling a call 
D)  buying a stock and selling a put

Question 12

An investor may reduce risk by simultaneously purchasing a stock and a put option.

Accepted Answer

A) True 
 B)False

Question 13

A warrant is an option issued by a corporation to buy its stock at a specified price within a specified time period.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

An option's intrinsic value exceeds the option's price.

Accepted Answer

A) True 
 B)False

Question 16

If the investor buys a stock index put,the individual will profit if the market rises.

Accepted Answer

A) True 
 B)False

Question 17

Stock index options permit investors to establish a position in the market without having to select individual stocks.

Accepted Answer

A) True 
 B)False

Question 18

A put is the option to sell stock at $35.The price of the stock is $34,and the price of the put is $2.
a.What is the intrinsic value of the put?
b.What is the time premium paid for the put?
c.What is the percentage return on an investment in the put if at the expiration of the put the price of the stock is $31?

Accepted Answer

a.
The intrinsic value: $35 -

Question 19

Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.

Accepted Answer

A) True 
 B)False

Question 20

Buying a stock index option reduces systematic risk.

Accepted Answer

A) True 
 B)False

Exam 19: An Introduction to Options

Because of arbitrage,the price of an option

A put and a call have the following terms: The price of the stock is currently $55.The price of the call and put are,respectively,$9 and $1.What will be the profit from buying the call or buying the put if,after six months,the price of the stock is $40,$50,or $60?

A call option is similar to a warrant except

The most the investor who sells a naked stock index option can lose is the cost of the option.

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

Writing covered call options is more risky than writing naked call options.

The price of an option is generally less than the option's intrinsic value.

Stock index options 1)permit the investor to short the market instead of individual stocks 2)require delivery of an index of stocks 3)limit the buyer's potential loss to the cost of the option

The value of a right is independent of the price of the stock that the right is an option to buy.

Arbitrage determines the maximum price of an option.

Which of the following is premised on lower stock prices?

An investor may reduce risk by simultaneously purchasing a stock and a put option.

A warrant is an option issued by a corporation to buy its stock at a specified price within a specified time period.

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

An option's intrinsic value exceeds the option's price.

If the investor buys a stock index put,the individual will profit if the market rises.

Stock index options permit investors to establish a position in the market without having to select individual stocks.

Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.

Buying a stock index option reduces systematic risk.

An Introduction to Investments

The Creation of Financial Assets

Securities Markets

The Time Value of Money

The Tax Environment

Risk and Portfolio Management

Investment Companies: Mutual Funds

Closed-End Investment Companies

The Valuation of Common Stock

Investment Returns and Aggregate Measures of Stock Markets

Dividends: Past, present, and Future

The Macroeconomic Environment for Investment Decisions

Analysis of Financial Statements

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

Investing in Foreign Securities

Investing in Nonfinancial Assets: Collectibles, resources, and Real Estate

Portfolio Planning and Management in an Efficient Market Context

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