Question 1

The intrinsic value of an option to buy stock rises as

Accepted Answer

A)  the strike price increases and the price of the stock declines 
B)  the strike price increases and the price of the stock rises 
C)  the strike price decreases and the price of the stock declines 
D)  the strike price decreases and the price of the stock rises 
A)  the strike price increases and the price of the stock declines 
B)  the strike price increases and the price of the stock rises 
C)  the strike price decreases and the price of the stock declines 
D)  the strike price decreases and the price of the stock rises

Question 2

The strike price of an option is fixed.

Accepted Answer

A) True 
 B)False

Question 3

The intrinsic value of a put depends on the
1)strike price
2)price of the stock
3)term on the put

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 4

If a stockholder exercises a right,that investor maintains his or her proportionate ownership in the corporation.

Accepted Answer

A) True 
 B)False

Question 5

A covered call is constructed by buying the stock and selling the call.

Accepted Answer

A) True 
 B)False

Question 6

The writer of a covered call cannot lose money if the price of the stock rises.

Accepted Answer

A) True 
 B)False

Question 7

Call options,unlike warrants,may be written by individuals.

Accepted Answer

A) True 
 B)False

Question 8

Corporations use rights offerings to sell new stock to current stockholders.

Accepted Answer

A) True 
 B)False

Question 9

The most the individual who buys a put option can lose is the cost of the option.

Accepted Answer

A) True 
 B)False

Question 10

A warrant is the option to buy one share of stock at $40.It expires after one year and currently sells for $10.The price of the stock is $32.What is the maximum possible profit if an investor buys one share of stock and shorts one warrant? What is the range of stock prices that yields a profit on this position?

Accepted Answer

The maximum possible profit on the posit

Question 11

When a call option is exercised,new stock is issued.

Accepted Answer

A) True 
 B)False

Question 12

A three-month call option with a strike price of $30 is currently selling for $4 when the price of the underlying stock is selling for $32.
a.What is the call's intrinsic value?
b.What is the time premium?
c.What is the maximum possible loss to the buyer of the call?
d.What is the maximum possible profit to the seller of the option?
e.Would you buy the call if you expected the price of the stock to fall?
Three months later the stock is selling for $39.
f.What is your profit or loss from buying the stock?
g.What is the option's intrinsic value?
h.What is your profit or loss from selling the call?
i.If you let the option expire,what do you receive?
j.What are the percentage returns you earned on investments in the call and in the stock?
k.If the price of the stock had been $30 at the option's expiration,what would have been the percentage returns on investments in the call and in the stock?
l.What is the primary reason for purchasing a call instead of the underlying stock?

Accepted Answer

a.Intrinsic value: $32 - 30 = $2
b.Time

Question 13

A put is an option to sell stock at a specified price within a specified time period.

Accepted Answer

A) True 
 B)False

Question 14

The price of a call depends on the 1.strike price
2)price of the underlying stock
3)term (i.e.,life)of the call

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 15

The intrinsic value of an option to buy stock is

Accepted Answer

A)  its price 
B)  its strike price 
C)  the difference between the stock's price and the option's strike price 
D)  the difference between the option's strike price and the option's price 
A)  its price 
B)  its strike price 
C)  the difference between the stock's price and the option's strike price 
D)  the difference between the option's strike price and the option's price

Question 16

Options to buy stock offer

Accepted Answer

A)  potential leverage 
B)  potential income 
C)  safety of principal 
D)  liquidity 
A)  potential leverage 
B)  potential income 
C)  safety of principal 
D)  liquidity

Question 17

The CBOE is 1.a secondary market in put and call options
2)a division of the SEC that regulates option trading
3)the first organized options exchange

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 18

Call options are usually for less than a year.

Accepted Answer

A) True 
 B)False

Question 19

The intrinsic value of a put is the price of the stock minus the put's strike price.

Accepted Answer

A) True 
 B)False

Question 20

Because of arbitrage,an option should not sell for less than its intrinsic value.

Accepted Answer

A) True 
 B)False

Exam 19: An Introduction to Options

The intrinsic value of an option to buy stock rises as

The strike price of an option is fixed.

The intrinsic value of a put depends on the 1)strike price 2)price of the stock 3)term on the put

If a stockholder exercises a right,that investor maintains his or her proportionate ownership in the corporation.

A covered call is constructed by buying the stock and selling the call.

The writer of a covered call cannot lose money if the price of the stock rises.

Call options,unlike warrants,may be written by individuals.

Corporations use rights offerings to sell new stock to current stockholders.

The most the individual who buys a put option can lose is the cost of the option.

When a call option is exercised,new stock is issued.

A put is an option to sell stock at a specified price within a specified time period.

The price of a call depends on the 1.strike price 2)price of the underlying stock 3)term (i.e.,life)of the call

The intrinsic value of an option to buy stock is

Options to buy stock offer

The CBOE is 1.a secondary market in put and call options 2)a division of the SEC that regulates option trading 3)the first organized options exchange

Call options are usually for less than a year.

The intrinsic value of a put is the price of the stock minus the put's strike price.

Because of arbitrage,an option should not sell for less than its intrinsic value.

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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