Question 1

There are a number of differences between forward and futures contracts. Which of the following statements is FALSE?

Accepted Answer

A)  Futures have less liquidity risk than forward contracts. 
B)  Futures have less credit risk than forward contracts. 
C)  Futures have more default risk than forward contracts. 
D)  In futures, the exchange becomes the counterparty to all transactions. 
E)  Futures have standardized terms of agreement. 
A)  Futures have less liquidity risk than forward contracts. 
B)  Futures have less credit risk than forward contracts. 
C)  Futures have more default risk than forward contracts. 
D)  In futures, the exchange becomes the counterparty to all transactions. 
E)  Futures have standardized terms of agreement.

Question 2

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is his dollar gain if the stock is selling for $80.00 per share at expiration?

Accepted Answer

A)  $200 loss 
B)  $700 loss 
C)  $200 gain 
D)  $700 gain 
E)  $900 gain 
A)  $200 loss 
B)  $700 loss 
C)  $200 gain 
D)  $700 gain 
E)  $900 gain

Question 3

Futures differ from forward contracts because

Accepted Answer

A)  futures have more liquidity risk. 
B)  futures have more credit risk. 
C)  futures have more maturity risk. 
D)  futures do not require collateral. 
E)  None of these are correct. 
A)  futures have more liquidity risk. 
B)  futures have more credit risk. 
C)  futures have more maturity risk. 
D)  futures do not require collateral. 
E)  None of these are correct.

Question 4

Investors buy call options because they expect the price of the underlying stock to increase before the expiration of the option.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements are TRUE?

Accepted Answer

A)  Futures contracts have less liquidity risk and credit risk than forward contracts. 
B)  Futures contract prices are strongly linked to the prevailing level of the underlying spot index. 
C)  Futures contract decrease in price the further forward in time the delivery date is set. 
D)  Futures contracts have more liquidity risk and credit risk than forward contracts. 
E)  Futures contract prices are weakly linked to the prevailing level of the underlying spot index. 
A)  Futures contracts have less liquidity risk and credit risk than forward contracts. 
B)  Futures contract prices are strongly linked to the prevailing level of the underlying spot index. 
C)  Futures contract decrease in price the further forward in time the delivery date is set. 
D)  Futures contracts have more liquidity risk and credit risk than forward contracts. 
E)  Futures contract prices are weakly linked to the prevailing level of the underlying spot index.

Question 6

A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate the arbitrage profit that you can earn.

Accepted Answer

A)  $0 
B)  $1 
C)  $5 
D)  $4 
E)  $9 
A)  $0 
B)  $1 
C)  $5 
D)  $4 
E)  $9

Question 7

Intrinsic value represents the value

Accepted Answer

A)  the seller could extract from the option if they exercised it immediately. 
B)  the buyer could extract from the option if they exercised it immediately. 
C)  seller pays for the time premium. 
D)  buyer pays for time premium. 
E)  below zero. 
A)  the seller could extract from the option if they exercised it immediately. 
B)  the buyer could extract from the option if they exercised it immediately. 
C)  seller pays for the time premium. 
D)  buyer pays for time premium. 
E)  below zero.

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 $42.00, what is Sarah's dollar gain or loss?

Accepted Answer

A)  $420 gain 
B)  $420 loss 
C)  $475 loss 
D)  $475 gain 
E)  $525 gain 
A)  $420 gain 
B)  $420 loss 
C)  $475 loss 
D)  $475 gain 
E)  $525 gain

Question 9

The futures market is a dealer market in which all the details of the transactions are negotiated.

Accepted Answer

A) True 
 B)False

Question 10

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.

Accepted Answer

A)  $25 
B)  -$5 
C)  $0 
D)  $20 
E)  $5 
A)  $25 
B)  -$5 
C)  $0 
D)  $20 
E)  $5

Question 11

Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75. October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the August and October options.

Accepted Answer

A)  -$0.50 
B)  $0 
C)  $0.50 
D)  $5 
E)  -$5 
A)  -$0.50 
B)  $0 
C)  $0.50 
D)  $5 
E)  -$5

Question 12

A stock currently sells for $150 per share. A call option on the stock with an exercise price of $155 currently sells for $2.50. The call 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 13

The option premium is the price the call buyer will pay to the option seller if the option is exercised

Accepted Answer

A) True 
 B)False

Question 14

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is Tom's dollar gain/loss if at expiration the stock is selling for $105.00 per share?

Accepted Answer

A)  $1000 gain 
B)  $200 loss 
C)  $1000 loss 
D)  $200 gain 
E)  $500 gain 
A)  $1000 gain 
B)  $200 loss 
C)  $1000 loss 
D)  $200 gain 
E)  $500 gain

Question 15

Which of the following statements is a true definition of an in-the-money option?

Accepted Answer

A)  a call option in which the stock price exceeds the exercise price 
B)  a call option in which the exercise price exceeds the stock price 
C)  a put option in which the stock price exceeds the exercise price 
D)  an index option in which the exercise price exceeds the stock price 
E)  a call option in which the call premium exceeds the stock price 
A)  a call option in which the stock price exceeds the exercise price 
B)  a call option in which the exercise price exceeds the stock price 
C)  a put option in which the stock price exceeds the exercise price 
D)  an index option in which the exercise price exceeds the stock price 
E)  a call option in which the call premium exceeds the stock price

Question 16

Holding a put option and the underlying security at the same time is an example of

Accepted Answer

A)  a collar. 
B)  a straddle. 
C)  income generation. 
D)  portfolio insurance. 
E)  a reverse collar. 
A)  a collar. 
B)  a straddle. 
C)  income generation. 
D)  portfolio insurance. 
E)  a reverse collar.

Question 17

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)  11.51 percent gain 
B)  115.15 percent gain 
C)  11.51 percent loss 
D)  115.15 percent loss 
E)  0 percent 
A)  11.51 percent gain 
B)  115.15 percent gain 
C)  11.51 percent loss 
D)  115.15 percent loss 
E)  0 percent

Question 18

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 time premium for the call option with a $50 exercise price is

Accepted Answer

A)  $0.00. 
B)  $1.50. 
C)  $1.75. 
D)  $4.25. 
E)  $9.25. 
A)  $0.00. 
B)  $1.50. 
C)  $1.75. 
D)  $4.25. 
E)  $9.25.

Question 19

Futures contracts are similar to forward contracts in that they both

Accepted Answer

A)  have volatile price movements and strong interest from buyers and sellers. 
B)  give the holder the option to make a transaction in the future. 
C)  have similar liquidity. 
D)  have similar credit risk. 
E)  trade on the same exchange. 
A)  have volatile price movements and strong interest from buyers and sellers. 
B)  give the holder the option to make a transaction in the future. 
C)  have similar liquidity. 
D)  have similar credit risk. 
E)  trade on the same exchange.

Question 20

A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.

Accepted Answer

A) True 
 B)False

Exam 14: An Introduction to Derivative Markets and Securities

There are a number of differences between forward and futures contracts. Which of the following statements is FALSE?

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is his dollar gain if the stock is selling for $80.00 per share at expiration?

Futures differ from forward contracts because

Investors buy call options because they expect the price of the underlying stock to increase before the expiration of the option.

Which of the following statements are TRUE?

A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate the arbitrage profit that you can earn.

Intrinsic value represents the value

The futures market is a dealer market in which all the details of the transactions are negotiated.

Consider a stock that is currently trading at $10. Calculate the intrinsic value for a call option that has an exercise price of $15.

Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75. October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the August and October options.

A stock currently sells for $150 per share. A call option on the stock with an exercise price of $155 currently sells for $2.50. The call option is

The option premium is the price the call buyer will pay to the option seller if the option is exercised

Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is Tom's dollar gain/loss if at expiration the stock is selling for $105.00 per share?

Which of the following statements is a true definition of an in-the-money option?

Holding a put option and the underlying security at the same time is an example of

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?

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 time premium for the call option with a $50 exercise price is

Futures contracts are similar to forward contracts in that they both

A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.

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