Question 1

According to put/call parity:

Accepted Answer

A)  Stock price + Call Price = Put Price + Risk Free Bond Price 
B)  Stock price + Put Price = Call Price + Risk Free Bond Price 
C)  Put price + Call Price = Stock Price + Risk Free Bond Price 
D)  Stock price - Put Price = Call Price + Risk Free Bond Price 
E)  Stock price + Call Price = Put Price - Risk Free Bond Price 
A)  Stock price + Call Price = Put Price + Risk Free Bond Price 
B)  Stock price + Put Price = Call Price + Risk Free Bond Price 
C)  Put price + Call Price = Stock Price + Risk Free Bond Price 
D)  Stock price - Put Price = Call Price + Risk Free Bond Price 
E)  Stock price + Call Price = Put Price - Risk Free Bond Price B

Question 2

A stock currently sells for $75 per share. A put option on the stock with an exercise price of $70 currently sells for $0.50. The put option is

Accepted Answer

A)  at-the-money. 
B)  in-the-money. 
C)  out-of-the-money. 
D)  at breakeven. 
E)  above-the-money. 
A)  at-the-money. 
B)  in-the-money. 
C)  out-of-the-money. 
D)  at breakeven. 
E)  above-the-money. C

Question 3

Assume that you have purchased a call option with a strike price $60 for $5. At the same time, you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

Accepted Answer

A)  $10 
B)  -$4 
C)  $5 
D)  $6 
E)  $15 
A)  $10 
B)  -$4 
C)  $5 
D)  $6 
E)  $15 D

Question 4

A primary function of futures markets is to allow investors to transfer risk.

Accepted Answer

A) True 
 B)False

Question 5

Derivative securities can be used

Accepted Answer

A)  by investors in the same way as the underlying security. 
B)  to modify the risk and expected return characteristics of existing investment portfolios. 
C)  to duplicate cash flow patterns for arbitrage opportunities. 
D)  to protect against potential price declines. 
E)  All of these are correct. 
A)  by investors in the same way as the underlying security. 
B)  to modify the risk and expected return characteristics of existing investment portfolios. 
C)  to duplicate cash flow patterns for arbitrage opportunities. 
D)  to protect against potential price declines. 
E)  All of these are correct.

Question 6

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

Accepted Answer

A)  -$1000 
B)  $1000 
C)  $575 
D)  -$575 
E)  $0 
A)  -$1000 
B)  $1000 
C)  $575 
D)  -$575 
E)  $0

Question 7

The price at which the stock can be acquired or sold is the exercise price.

Accepted Answer

A) True 
 B)False

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 14.3. If at expiration Peppy is selling for $47.00, what is Sarah's dollar gain or loss?

Accepted Answer

A)  $25 loss 
B)  $250 loss 
C)  $25 gain 
D)  $250 gain 
E)  $0 
A)  $25 loss 
B)  $250 loss 
C)  $25 gain 
D)  $250 gain 
E)  $0

Question 9

Which of the following does NOT influence the option price?

Accepted Answer

A)  past stock price 
B)  up and down factors u and d 
C)  risk free rate 
D)  exercise price 
E)  current stock price 
A)  past stock price 
B)  up and down factors u and d 
C)  risk free rate 
D)  exercise price 
E)  current stock price

Question 10

An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put.

Accepted Answer

A) True 
 B)False

Question 11

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Accepted Answer

A)  $25 
B)  $35 
C)  $0 
D)  -$10 
E)  $10 
A)  $25 
B)  $35 
C)  $0 
D)  -$10 
E)  $10

Question 12

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

Accepted Answer

A) True 
 B)False

Question 13

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

Accepted Answer

A)  -$525 
B)  $1000 
C)  $0 
D)  -$1000 
E)  $525 
A)  -$525 
B)  $1000 
C)  $0 
D)  -$1000 
E)  $525

Question 14

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50.
  
-Refer to Exhibit 14.5. The intrinsic value for the put option with a $50 exercise price is

Accepted Answer

A)  $0.00. 
B)  $1.50. 
C)  $2.25. 
D)  $3.75. 
E)  $8.75. 
A)  $0.00. 
B)  $1.50. 
C)  $2.25. 
D)  $3.75. 
E)  $8.75.

Question 15

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

Accepted Answer

A)  $3 
B)  -$2 
C)  $2 
D)  -$3 
E)  $0 
A)  $3 
B)  -$2 
C)  $2 
D)  -$3 
E)  $0

Question 16

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common stock selling at $37 1/2 per share and is considering an Olivia option.
  
-Refer to Exhibit 14.1. If Bruce buys a March put option with an exercise price of 40, what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?

Accepted Answer

A)  $825.00 loss 
B)  $475.00 loss 
C)  $350.00 loss 
D)  $25.00 loss 
E)  $50.00 gain 
A)  $825.00 loss 
B)  $475.00 loss 
C)  $350.00 loss 
D)  $25.00 loss 
E)  $50.00 gain

Question 17

A buyer of the call option is NOT speculating on the

Accepted Answer

A)  direction of the price movement of the underlying investment. 
B)  timing of the price movement of the underlying investment. 
C)  leverage that a call option creates with respect to the underlying investment. 
D)  volatility of the price movement of the underlying investment. 
E)  liquidity of the underlying investment. 
A)  direction of the price movement of the underlying investment. 
B)  timing of the price movement of the underlying investment. 
C)  leverage that a call option creates with respect to the underlying investment. 
D)  volatility of the price movement of the underlying investment. 
E)  liquidity of the underlying investment.

Question 18

Forward contracts are traded over-the-counter and are generally not standardized.

Accepted Answer

A) True 
 B)False

Question 19

A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.

Accepted Answer

A) True 
 B)False

Question 20

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 14.3. What is Sarah's annualized gain/loss?

Accepted Answer

A)  60.60 percent gain 
B)  6.06 percent loss 
C)  60.60 percent loss 
D)  6.06 percent gain 
E)  0 percent 
A)  60.60 percent gain 
B)  6.06 percent loss 
C)  60.60 percent loss 
D)  6.06 percent gain 
E)  0 percent

According to put/call parity:

A stock currently sells for $75 per share. A put option on the stock with an exercise price of $70 currently sells for $0.50. The put option is

Assume that you have purchased a call option with a strike price $60 for $5. At the same time, you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

A primary function of futures markets is to allow investors to transfer risk.

Derivative securities can be used

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

The price at which the stock can be acquired or sold is the exercise price.

Which of the following does NOT influence the option price?

An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put.

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50. -Refer to Exhibit 14.5. The intrinsic value for the put option with a $50 exercise price is

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

A buyer of the call option is NOT speculating on the

Forward contracts are traded over-the-counter and are generally not standardized.

A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 14.3. What is Sarah's annualized gain/loss?

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 14: An Introduction to Derivative Markets and Securities

According to put/call parity:

A stock currently sells for $75 per share. A put option on the stock with an exercise price of $70 currently sells for $0.50. The put option is

Assume that you have purchased a call option with a strike price $60 for $5. At the same time, you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

A primary function of futures markets is to allow investors to transfer risk.

Derivative securities can be used

A stock currently trades at $110. June call options on the stock with a strike price of $120 are priced at $5.75. Calculate the dollar return on one call contract.

The price at which the stock can be acquired or sold is the exercise price.

Which of the following does NOT influence the option price?

An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put.

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

A stock currently trades at $110. June put options on the stock with a strike price of $100 are priced at $5.25. Calculate the dollar return on one put contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50. -Refer to Exhibit 14.5. The intrinsic value for the put option with a $50 exercise price is

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

A buyer of the call option is NOT speculating on the

Forward contracts are traded over-the-counter and are generally not standardized.

A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 14.3. What is Sarah's annualized gain/loss?

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters