Exam 14: An Introduction to Derivative Markets and Securities

If an investor wants to acquire the right to buy or sell an asset, but not the obligation to do it, the best instrument is an option rather than a futures contract.

The initial value of a future contract is the price agreed upon in the contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent. -Refer to Exhibit 14.4. What should the price be of a call option that expires six months from today with an exercise price of $55?

A call option differs from a put option in that

A forward contract is similar to an option contract because they both

A stock currently sells for $15 per share. A put option on the stock with an exercise price of $15 currently sells for $1.50. The put option is

A call option is in the money if the current market price is above the strike price.

Which of the following is consistent with put-call-spot parity?

The price paid for the option contract is referred to as the

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent. -Refer to Exhibit 14.4. What is the value of a synthetic stock created with put and call options that expire in six months with an expiration price of $50?

The payoffs diagrams to both long and short positions in a forward contract are asymmetrical around the contract price.

The minimum value of an option is zero.

Which of the following is NOT a factor needed to calculate the value of an American call option?

An expiration date payoff and profit diagram for forward positions illustrates

A one-year call option has a strike price of 50, expires in 6 months, and has a price of $5.04. If the risk-free rate is 5 percent, and the current stock price is $50, what should the corresponding put be worth?

A stock currently trades for $63. Call options with a strike price of $62 sell for $4.00 and expire in six months. If the risk-free rate is 4 percent, what should the price of a put option with an exercise price of $62 be worth?

Which of the following factors is NOTconsidered in the valuation of call and put options?

A cash or spot contract is an agreement for the immediate delivery of an asset, such as the purchase of stock on the NYSE.

Forward contracts do not require an upfront premium.