Question 1

An option buyer must exercise the option on or before the expiration date.

Accepted Answer

A) True 
 B)False

Question 2

A one-year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk-free rate is 3 percent, and the current stock price is $45, what should the corresponding put be worth?

Accepted Answer

A)  $12.74 
B)  $10.48 
C)  $5.00 
D)  $9.00 
E)  $8.30 
A)  $12.74 
B)  $10.48 
C)  $5.00 
D)  $9.00 
E)  $8.30

Question 3

The value of a put option at expiration is

Accepted Answer

A)  max [0, S(T) - X]. 
B)  max [0, X - S(T)]. 
C)  min [0, X - S(T)]. 
D)  X 
A)  max [0, S(T) - X]. 
B)  max [0, X - S(T)]. 
C)  min [0, X - S(T)]. 
D)  X

Question 4

A call option in which the stock price is higher than the exercise price is said to be

Accepted Answer

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

Question 5

The CBOE brought numerous innovations to the option market. Which of the following is NOT such an innovation?

Accepted Answer

A)  creation of a central marketplace 
B)  creation of a non-liquid secondary option market 
C)  introduction of a Clearing Corporation 
D)  standardization of all expiration dates 
E)  standardization of all exercise prices 
A)  creation of a central marketplace 
B)  creation of a non-liquid secondary option market 
C)  introduction of a Clearing Corporation 
D)  standardization of all expiration dates 
E)  standardization of all exercise prices

Question 6

Which of the following statements is TRUE?

Accepted Answer

A)  The buyer of a futures contract is said to be long futures. 
B)  The buyer of a futures contract is said to be long futures 
C)  The seller of a futures contract is said to be long futures 
D)  The buyer of a futures contract is said to be short futures. 
E)  The buyer of a futures contract is unwinding a long position. 
A)  The buyer of a futures contract is said to be long futures. 
B)  The buyer of a futures contract is said to be long futures 
C)  The seller of a futures contract is said to be long futures 
D)  The buyer of a futures contract is said to be short futures. 
E)  The buyer of a futures contract is unwinding a long position.

Question 7

Forward and future contracts, as well as options, are types of derivative securities.

Accepted Answer

A) True 
 B)False

Question 8

The payoffs to both the long and short position in the forward contact are symmetric around the contract price.

Accepted Answer

A) True 
 B)False

Question 9

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

Accepted Answer

A)  $15 
B)  $55 
C)  $35 
D)  -$15 
E)  $0 
A)  $15 
B)  $55 
C)  $35 
D)  -$15 
E)  $0

Question 10

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk-free bond has a price of $30. Calculate the price of the January put option.

Accepted Answer

A)  $11 
B)  $24 
C)  $19 
D)  $30 
E)  $25 
A)  $11 
B)  $24 
C)  $19 
D)  $30 
E)  $25

Question 11

The price at which a futures contract is set at the end of the day is the

Accepted Answer

A)  stock price. 
B)  strike price. 
C)  maintenance price. 
D)  settlement price. 
E)  parity price. 
A)  stock price. 
B)  strike price. 
C)  maintenance price. 
D)  settlement price. 
E)  parity price.

Question 12

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 decides to buy a March call option with an exercise price of 35, what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?

Accepted Answer

A)  $225.00 loss 
B)  $350.00 loss 
C)  $225.00 gain 
D)  $350.00 gain 
E)  $850.00 gain 
A)  $225.00 loss 
B)  $350.00 loss 
C)  $225.00 gain 
D)  $350.00 gain 
E)  $850.00 gain

Question 13

In the forward market, both parties are required to post collateral or margin.

Accepted Answer

A) True 
 B)False

Question 14

All features of a forward contract are standardized, except for price and number of contracts.

Accepted Answer

A) True 
 B)False

Question 15

The forward market has low liquidity relative to the futures market.

Accepted Answer

A) True 
 B)False

Question 16

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44 per share:
  
-Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?

Accepted Answer

A)  161.54 percent gain 
B)  53.85 percent gain 
C)  161.54 percent loss 
D)  11.11 percent gain 
E)  53.85 percent loss 
A)  161.54 percent gain 
B)  53.85 percent gain 
C)  161.54 percent loss 
D)  11.11 percent gain 
E)  53.85 percent loss

Question 17

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

Accepted Answer

A)  not correlated with the existing exposure. 
B)  positively correlated with the existing exposure. 
C)  negatively correlated with the existing exposure. 
D)  at breakeven with the existing exposure. 
E)  imperfectly correlated with the existing exposure. 
A)  not correlated with the existing exposure. 
B)  positively correlated with the existing exposure. 
C)  negatively correlated with the existing exposure. 
D)  at breakeven with the existing exposure. 
E)  imperfectly correlated with the existing exposure.

Question 18

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

Accepted Answer

A)  max [0, V - X]. 
B)  max [0, X - V]. 
C)  min [0, V - X]. 
D)  min [0, X - V]. 
E)  max [0, V > X]. 
A)  max [0, V - X]. 
B)  max [0, X - V]. 
C)  min [0, V - X]. 
D)  min [0, X - V]. 
E)  max [0, V > X].

Question 19

A stock currently sells for $15 per share. A put option on the stock with an exercise price of $20 currently sells for $6.50. 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.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A)  Derivatives help shift risk from risk-adverse investors to risk-takers. 
B)  Derivatives assist in forming cash prices. 
C)  Derivatives provide additional information to the market. 
D)  In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market. 
E)  Some derivatives trade hypothetical underlying assets. 
A)  Derivatives help shift risk from risk-adverse investors to risk-takers. 
B)  Derivatives assist in forming cash prices. 
C)  Derivatives provide additional information to the market. 
D)  In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market. 
E)  Some derivatives trade hypothetical underlying assets.

An option buyer must exercise the option on or before the expiration date.

A one-year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk-free rate is 3 percent, and the current stock price is $45, what should the corresponding put be worth?

The value of a put option at expiration is

A call option in which the stock price is higher than the exercise price is said to be

The CBOE brought numerous innovations to the option market. Which of the following is NOT such an innovation?

Which of the following statements is TRUE?

Forward and future contracts, as well as options, are types of derivative securities.

The payoffs to both the long and short position in the forward contact are symmetric around the contract price.

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk-free bond has a price of $30. Calculate the price of the January put option.

The price at which a futures contract is set at the end of the day is the

In the forward market, both parties are required to post collateral or margin.

All features of a forward contract are standardized, except for price and number of contracts.

The forward market has low liquidity relative to the futures market.

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

A stock currently sells for $15 per share. A put option on the stock with an exercise price of $20 currently sells for $6.50. The put option is

Which of the following statements is FALSE?

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

An option buyer must exercise the option on or before the expiration date.

A one-year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk-free rate is 3 percent, and the current stock price is $45, what should the corresponding put be worth?

The value of a put option at expiration is

A call option in which the stock price is higher than the exercise price is said to be

The CBOE brought numerous innovations to the option market. Which of the following is NOT such an innovation?

Which of the following statements is TRUE?

Forward and future contracts, as well as options, are types of derivative securities.

The payoffs to both the long and short position in the forward contact are symmetric around the contract price.

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk-free bond has a price of $30. Calculate the price of the January put option.

The price at which a futures contract is set at the end of the day is the

In the forward market, both parties are required to post collateral or margin.

All features of a forward contract are standardized, except for price and number of contracts.

The forward market has low liquidity relative to the futures market.

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

A stock currently sells for $15 per share. A put option on the stock with an exercise price of $20 currently sells for $6.50. The put option is

Which of the following statements is FALSE?

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