Question 1

The buyer of a straddle expects stock prices to move strongly in either direction.

Accepted Answer

A) True 
 B)False

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually, and they mature in 10 years.
-Refer to Exhibit 16.9. At present, what would be the minimum value of the bond?

Accepted Answer

A)  $600.00 
B)  $796.83 
C)  $889.82 
D)  $900.00 
E)  $1000.00 
A)  $600.00 
B)  $796.83 
C)  $889.82 
D)  $900.00 
E)  $1000.00

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two-period (two six-month periods) binomial option pricing model. A stock currently trades at $60 per share, and a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15 percent or fall by 15 percent during each six-month period. The one-year risk free rate is 3 percent.
-Refer to Exhibit 16.2. Calculate the possible prices of the stock at the end of one year.

Accepted Answer

A)  $69, $51, $79.35 
B)  $51, $79.35, $58.65 
C)  $79.35, $58.65, $43.35 
D)  $58.65, $43.35, $14.35 
E)  $72.65, $53.35, $17.25 
A)  $69, $51, $79.35 
B)  $51, $79.35, $58.65 
C)  $79.35, $58.65, $43.35 
D)  $58.65, $43.35, $14.35 
E)  $72.65, $53.35, $17.25

Question 4

A credit default swap (CDS) is better regarded as an option-like arrangement.

Accepted Answer

A) True 
 B)False

Question 5

The binomial option pricing model and the Black and Scholes model are similar because they are both discrete models.

Accepted Answer

A) True 
 B)False

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $18.75 loss 
B)  $18.75 gain 
C)  $1,668.75 gain 
D)  $1,668.75 loss 
E)  $1,687.50 loss 
A)  $18.75 loss 
B)  $18.75 gain 
C)  $1,668.75 gain 
D)  $1,668.75 loss 
E)  $1,687.50 loss

Question 7

In convertible bonds, the value of the common stock price upon immediate conversion is the

Accepted Answer

A)  put-call parity price. 
B)  conversion parity price. 
C)  cash equivalent price. 
D)  convertible price. 
E)  redemption price. 
A)  put-call parity price. 
B)  conversion parity price. 
C)  cash equivalent price. 
D)  convertible price. 
E)  redemption price.

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00.
-Refer to Exhibit 16.6. What would the net value of a covered call position be if the stock price at expiration is $35?

Accepted Answer

A)  $29.00 
B)  $30.65 
C)  $33.55 
D)  $36.00 
E)  $36.65 
A)  $29.00 
B)  $30.65 
C)  $33.55 
D)  $36.00 
E)  $36.65

Question 9

The minimum price of a convertible bond is

Accepted Answer

A)  min (Bond Value, Conversion Value). 
B)  max (Bond Value, Conversion Value). 
C)  min (Stock Value, Conversion Value). 
D)  max (Stock Value, Conversion Value). 
E)  None of these are correct. 
A)  min (Bond Value, Conversion Value). 
B)  max (Bond Value, Conversion Value). 
C)  min (Stock Value, Conversion Value). 
D)  max (Stock Value, Conversion Value). 
E)  None of these are correct.

Question 10

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

Accepted Answer

A) True 
 B)False

Question 11

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
  
-Refer to Exhibit 16.4. Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at expiration of $45.

Accepted Answer

A)  $6.35, $18.85 
B)  $29.65, $42.15 
C)  $21.65, $34.15 
D)  $8, $8 
E)  -$8, -$8 
A)  $6.35, $18.85 
B)  $29.65, $42.15 
C)  $21.65, $34.15 
D)  $8, $8 
E)  -$8, -$8

Question 12

A money spread involves buying and selling call options in the same stock with

Accepted Answer

A)  the same time period and exercise price. 
B)  the same time period but different exercise price. 
C)  a different time period but same exercise price. 
D)  a different time period and different exercise price. 
E)  options in different markets. 
A)  the same time period and exercise price. 
B)  the same time period but different exercise price. 
C)  a different time period but same exercise price. 
D)  a different time period and different exercise price. 
E)  options in different markets.

Question 13

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

Accepted Answer

A)  the stock price 
B)  the exercise price 
C)  the exchange on which the option is listed 
D)  the volatility of the underlying stock 
E)  the interest rate 
A)  the stock price 
B)  the exercise price 
C)  the exchange on which the option is listed 
D)  the volatility of the underlying stock 
E)  the interest rate

Question 14

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

Accepted Answer

A)  future security price 
B)  exercise price 
C)  time to expiration 
D)  risk-free rate 
E)  security price volatility 
A)  future security price 
B)  exercise price 
C)  time to expiration 
D)  risk-free rate 
E)  security price volatility

Question 15

The Black-Scholes model assumes that stock price movements can be described by

Accepted Answer

A)  geometric moving averages. 
B)  arithmetic moving averages. 
C)  regression towards the mean. 
D)  geometric Brownian motion. 
E)  stochastic time lags. 
A)  geometric moving averages. 
B)  arithmetic moving averages. 
C)  regression towards the mean. 
D)  geometric Brownian motion. 
E)  stochastic time lags.

Question 16

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $37.50 loss 
B)  $37.50 gain 
C)  $100.00 loss 
D)  $100.00 gain 
E)  $2,437.50 loss 
A)  $37.50 loss 
B)  $37.50 gain 
C)  $100.00 loss 
D)  $100.00 gain 
E)  $2,437.50 loss

Question 17

A vertical spread involves buying and selling call options in the same stock with

Accepted Answer

A)  the same time period and price. 
B)  the same time period but different price. 
C)  a different time period but same price. 
D)  a different time period and different price. 
E)  options in different markets. 
A)  the same time period and price. 
B)  the same time period but different price. 
C)  a different time period but same price. 
D)  a different time period and different price. 
E)  options in different markets.

Question 18

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
  
-Refer to Exhibit 16.4. A covered call is an appropriate strategy if

Accepted Answer

A)  an investor wishes to generate additional income. 
B)  an investor wished to insure against a decline in share values. 
C)  an investor expected share prices to be volatile. 
D)  an investor expected share prices to remain in a trading range. 
E)  an investor expected share prices to be volatile but was inclined to be bullish. 
A)  an investor wishes to generate additional income. 
B)  an investor wished to insure against a decline in share values. 
C)  an investor expected share prices to be volatile. 
D)  an investor expected share prices to remain in a trading range. 
E)  an investor expected share prices to be volatile but was inclined to be bullish.

Question 19

A foreign currency option contract traded on U.S. exchanges allows for the sale or purchase of a set amount of

Accepted Answer

A)  U.S. currency at a floating exchange rate. 
B)  U.S. currency at a fixed exchange rate. 
C)  foreign currency at a floating exchange rate. 
D)  foreign currency at a fixed exchange rate. 
E)  None of these are correct. 
A)  U.S. currency at a floating exchange rate. 
B)  U.S. currency at a fixed exchange rate. 
C)  foreign currency at a floating exchange rate. 
D)  foreign currency at a fixed exchange rate. 
E)  None of these are correct.

Question 20

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $1,687.50 loss 
B)  $3,362.50 loss 
C)  $3,675.50 gain 
D)  $13.00 gain 
E)  $13.00 loss 
A)  $1,687.50 loss 
B)  $3,362.50 loss 
C)  $3,675.50 gain 
D)  $13.00 gain 
E)  $13.00 loss

The buyer of a straddle expects stock prices to move strongly in either direction.

A credit default swap (CDS) is better regarded as an option-like arrangement.

The binomial option pricing model and the Black and Scholes model are similar because they are both discrete models.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

In convertible bonds, the value of the common stock price upon immediate conversion is the

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00. -Refer to Exhibit 16.6. What would the net value of a covered call position be if the stock price at expiration is $35?

The minimum price of a convertible bond is

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at expiration of $45.

A money spread involves buying and selling call options in the same stock with

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

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

The Black-Scholes model assumes that stock price movements can be described by

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

A vertical spread involves buying and selling call options in the same stock with

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. A covered call is an appropriate strategy if

A foreign currency option contract traded on U.S. exchanges allows for the sale or purchase of a set amount of

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

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

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 16: Option Contracts

The buyer of a straddle expects stock prices to move strongly in either direction.

A credit default swap (CDS) is better regarded as an option-like arrangement.

The binomial option pricing model and the Black and Scholes model are similar because they are both discrete models.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

In convertible bonds, the value of the common stock price upon immediate conversion is the

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) GE Corporation has a put option selling for $2.90 and a call option selling for $1.95, both with a strike price of $29.00. -Refer to Exhibit 16.6. What would the net value of a covered call position be if the stock price at expiration is $35?

The minimum price of a convertible bond is

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. Calculate the payoffs of a short straddle at a stock price at expiration of $20 and a stock price at expiration of $45.

A money spread involves buying and selling call options in the same stock with

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

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

The Black-Scholes model assumes that stock price movements can be described by

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

A vertical spread involves buying and selling call options in the same stock with

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for Citigroup -Refer to Exhibit 16.4. A covered call is an appropriate strategy if

A foreign currency option contract traded on U.S. exchanges allows for the sale or purchase of a set amount of

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

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

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters