Question 1

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

Accepted Answer

A)  $10 
B)  $50 
C)  $55 
D)  -$10 
E)  $0 
A)  $10 
B)  $50 
C)  $55 
D)  -$10 
E)  $0

Question 2

The minimum amount that must be maintained in an account is called the maintenance margin.

Accepted Answer

A) True 
 B)False

Question 3

A stock currently sells for $75 per share. A call option on the stock with an exercise price of $70 currently sells for $5.50. 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 4

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 is at $30 in four months and the stock was purchased?

Accepted Answer

A)  9.54 percent loss 
B)  95.45 percent loss 
C)  0.9545 percent gain 
D)  95.45 percent gain 
E)  9.54 percent gain 
A)  9.54 percent loss 
B)  95.45 percent loss 
C)  0.9545 percent gain 
D)  95.45 percent gain 
E)  9.54 percent gain

Question 5

In the valuation of an option contract, the following statements apply EXCEPT:

Accepted Answer

A)  The value of an option increases with its maturity. 
B)  There is a negative relationship between the market interest rate and the value of a call option. 
C)  The value of a call option is negatively related to its exercise price. 
D)  The value of a call option is positively related to the volatility of the underlying asset. 
E)  The value of a call option is positively related to the price of the underlying stock. 
A)  The value of an option increases with its maturity. 
B)  There is a negative relationship between the market interest rate and the value of a call option. 
C)  The value of a call option is negatively related to its exercise price. 
D)  The value of a call option is positively related to the volatility of the underlying asset. 
E)  The value of a call option is positively related to the price of the underlying stock.

Question 6

Which of the following statements is a true definition of an out-of-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 call option in which the exercise price exceeds the stock price 
D)  a put 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 call option in which the exercise price exceeds the stock price 
D)  a put option in which the exercise price exceeds the stock price. 
E)  a call option in which the call premium exceeds the stock price

Question 7

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk-free bond.

Accepted Answer

A)  $120 
B)  $15 
C)  $105 
D)  $116 
E)  $104 
A)  $120 
B)  $15 
C)  $105 
D)  $116 
E)  $104

Question 8

A hedge strategy known as a collar agreement involves the simultaneous

Accepted Answer

A)  purchase of an in-the-money put and purchase of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
B)  sale of an out-of-the-money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
C)  purchase of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price. 
D)  purchase of an out-of-the-money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
E)  sale of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price. 
A)  purchase of an in-the-money put and purchase of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
B)  sale of an out-of-the-money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
C)  purchase of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price. 
D)  purchase of an out-of-the-money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
E)  sale of an in-the-money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price.

Question 9

Futures contracts are slower to absorb new information than forward contracts.

Accepted Answer

A) True 
 B)False

Question 10

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 put option with a $45 exercise price is

Accepted Answer

A)  $0.00. 
B)  $1.50. 
C)  $2.75. 
D)  $5.25. 
E)  $6.50. 
A)  $0.00. 
B)  $1.50. 
C)  $2.75. 
D)  $5.25. 
E)  $6.50.

Question 11

A one-year call option has a strike price of 60, expires in 6 months, and has a price of $2.5. If the risk-free rate is 7 percent, and the current stock price is $55, what should the corresponding put be worth?

Accepted Answer

A)  $5.00 
B)  $4.56 
C)  $5.50 
D)  $7.08 
E)  $7.54 
A)  $5.00 
B)  $4.56 
C)  $5.50 
D)  $7.08 
E)  $7.54

Question 12

You own a call option and put option that both have the same exercise price of $50, and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.

Accepted Answer

A)  $1.00 
B)  $2.00 
C)  $3.00 
D)  $4.00 
E)  $5.00 
A)  $1.00 
B)  $2.00 
C)  $3.00 
D)  $4.00 
E)  $5.00

Question 13

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

Accepted Answer

A)  $25 
B)  -$2 
C)  $2 
D)  -$25 
E)  $0 
A)  $25 
B)  -$2 
C)  $2 
D)  -$25 
E)  $0

Question 14

An advantage of a forward contract over a futures contract is that

Accepted Answer

A)  the terms of the contract are flexible. 
B)  it is more liquid. 
C)  it trades through a centralized market exchange. 
D)  it is easier to unwind due to contract homogeneity. 
E)  the counterparty is anonymous. 
A)  the terms of the contract are flexible. 
B)  it is more liquid. 
C)  it trades through a centralized market exchange. 
D)  it is easier to unwind due to contract homogeneity. 
E)  the counterparty is anonymous.

Question 15

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 14.6. How could an investor create arbitrage profits?

Accepted Answer

A)  sell the stock short, write a put, buy a call, and invest the proceeds at the risk-free rate 
B)  buy the stock, write a put, buy a call, and invest the proceeds at the risk-free rate 
C)  sell the stock short, buy a put, write a call, and invest the proceeds at the risk-free rate 
D)  buy the stock, write a put, buy a call, and borrow the strike price at the risk-free rate 
E)  sell the stock short, write a put, buy a call, and borrow the strike price at the risk-free rate. 
A)  sell the stock short, write a put, buy a call, and invest the proceeds at the risk-free rate 
B)  buy the stock, write a put, buy a call, and invest the proceeds at the risk-free rate 
C)  sell the stock short, buy a put, write a call, and invest the proceeds at the risk-free rate 
D)  buy the stock, write a put, buy a call, and borrow the strike price at the risk-free rate 
E)  sell the stock short, write a put, buy a call, and borrow the strike price at the risk-free rate.

Question 16

The derivative based strategy known as portfolio insurance involves

Accepted Answer

A)  the sale of a put option on the underlying security position. 
B)  the purchase of a put on the underlying security position. 
C)  the sale of a call on the underlying security position. 
D)  the purchase of a call on the underlying security position. 
E)  the simultaneous sale of an out-of-the-money put and purchase of an out-of-the-money call. 
A)  the sale of a put option on the underlying security position. 
B)  the purchase of a put on the underlying security position. 
C)  the sale of a call on the underlying security position. 
D)  the purchase of a call on the underlying security position. 
E)  the simultaneous sale of an out-of-the-money put and purchase of an out-of-the-money call.

Question 17

A one-year call option has a strike price of 70, expires in three months, and has a price of $7.34. If the risk-free rate is 6 percent, and the current stock price is $62, what should the corresponding put be worth?

Accepted Answer

A)  $5.34 
B)  $8.00 
C)  $10.68 
D)  $14.33 
E)  $13.33 
A)  $5.34 
B)  $8.00 
C)  $10.68 
D)  $14.33 
E)  $13.33

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit, but you are troubled about the short-run behavior of the stock market. An effective action on your part would be to

Accepted Answer

A)  buy a put option on the stock. 
B)  write a call option on the stock. 
C)  purchase an index option. 
D)  purchase an interest rate option. 
E)  write a put option on the stock. 
A)  buy a put option on the stock. 
B)  write a call option on the stock. 
C)  purchase an index option. 
D)  purchase an interest rate option. 
E)  write a put option on the stock.

Question 20

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 call option with a $45 exercise price is

Accepted Answer

A)  $0.00. 
B)  $1.50. 
C)  $5.00. 
D)  $5.25. 
E)  $6.75. 
A)  $0.00. 
B)  $1.50. 
C)  $5.00. 
D)  $5.25. 
E)  $6.75.

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

The minimum amount that must be maintained in an account is called the maintenance margin.

A stock currently sells for $75 per share. A call option on the stock with an exercise price of $70 currently sells for $5.50. The call option is

In the valuation of an option contract, the following statements apply EXCEPT:

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

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk-free bond.

A hedge strategy known as a collar agreement involves the simultaneous

Futures contracts are slower to absorb new information than forward contracts.

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 put option with a $45 exercise price is

A one-year call option has a strike price of 60, expires in 6 months, and has a price of $2.5. If the risk-free rate is 7 percent, and the current stock price is $55, what should the corresponding put be worth?

You own a call option and put option that both have the same exercise price of $50, and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

An advantage of a forward contract over a futures contract is that

The derivative based strategy known as portfolio insurance involves

A one-year call option has a strike price of 70, expires in three months, and has a price of $7.34. If the risk-free rate is 6 percent, and the current stock price is $62, what should the corresponding put be worth?

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

You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit, but you are troubled about the short-run behavior of the stock market. An effective action on your part would be to

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 call option with a $45 exercise price is

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

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

The minimum amount that must be maintained in an account is called the maintenance margin.

A stock currently sells for $75 per share. A call option on the stock with an exercise price of $70 currently sells for $5.50. The call option is

In the valuation of an option contract, the following statements apply EXCEPT:

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

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk-free bond.

A hedge strategy known as a collar agreement involves the simultaneous

Futures contracts are slower to absorb new information than forward contracts.

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 put option with a $45 exercise price is

A one-year call option has a strike price of 60, expires in 6 months, and has a price of $2.5. If the risk-free rate is 7 percent, and the current stock price is $55, what should the corresponding put be worth?

You own a call option and put option that both have the same exercise price of $50, and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.

Assume that you purchased shares of a stock at a price of $35 per share. At this time, you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

An advantage of a forward contract over a futures contract is that

The derivative based strategy known as portfolio insurance involves

A one-year call option has a strike price of 70, expires in three months, and has a price of $7.34. If the risk-free rate is 6 percent, and the current stock price is $62, what should the corresponding put be worth?

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

You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit, but you are troubled about the short-run behavior of the stock market. An effective action on your part would be to

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