Question 1

The issuance of convertibles will ultimately lead to greater dilution than an initial issue of stock.

Accepted Answer

A) True 
 B)False

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $668.75 gain 
B)  $668.75 loss 
C)  $94.56 gain 
D)  $94.56 loss 
E)  $81.25 loss 
A)  $668.75 gain 
B)  $668.75 loss 
C)  $94.56 gain 
D)  $94.56 loss 
E)  $81.25 loss

Question 3

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

Accepted Answer

A)  Spider. 
B)  QQQ. 
C)  VIX. 
D)  CIN. 
E)  VOL. 
A)  Spider. 
B)  QQQ. 
C)  VIX. 
D)  CIN. 
E)  VOL.

Question 4

If the hedge ratio is 0.50, this indicates that the portfolio should hold

Accepted Answer

A)  two shares of stock for every call option written. 
B)  one share of stock for every two call options written. 
C)  two shares of stock for every call option purchased. 
D)  one share of stock for every two call options purchased. 
E)  two call options for every put option written. 
A)  two shares of stock for every call option written. 
B)  one share of stock for every two call options written. 
C)  two shares of stock for every call option purchased. 
D)  one share of stock for every two call options purchased. 
E)  two call options for every put option written.

Question 5

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.1. How much must an investor pay for one call option contract?

Accepted Answer

A)  $680 
B)  $815 
C)  $625 
D)  $590 
E)  $340 
A)  $680 
B)  $815 
C)  $625 
D)  $590 
E)  $340

Question 6

The conversion price parity for a convertible bond is defined as

Accepted Answer

A)  Market Price of Convertible Bond / Conversion Ration. 
B)  Market Price of Convertible Bond * Conversion Ration. 
C)  Market Price of Convertible Bond - Conversion Ration. 
D)  Market Price of Convertible Bond + Conversion Ration. 
E)  None of these are correct. 
A)  Market Price of Convertible Bond / Conversion Ration. 
B)  Market Price of Convertible Bond * Conversion Ration. 
C)  Market Price of Convertible Bond - Conversion Ration. 
D)  Market Price of Convertible Bond + Conversion Ration. 
E)  None of these are correct.

Question 7

In the Black-Scholes option pricing model, an increase in security volatility ( $\sigma$) will cause

Accepted Answer

A)  an increase in call value and an increase in put value. 
B)  an increase in call value and a decrease in put value. 
C)  a decrease in call value and an increase in put value. 
D)  a decrease in call value and a decrease in put value. 
E)  an increase in call value and an increase or decrease in put value. 
A)  an increase in call value and an increase in put value. 
B)  an increase in call value and a decrease in put value. 
C)  a decrease in call value and an increase in put value. 
D)  a decrease in call value and a decrease in put value. 
E)  an increase in call value and an increase or decrease in put value.

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?

Accepted Answer

A)  $0 
B)  $3750 gain 
C)  $3660 gain 
D)  $4650 loss 
E)  $2680 loss 
A)  $0 
B)  $3750 gain 
C)  $3660 gain 
D)  $4650 loss 
E)  $2680 loss

Question 9

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)  purchase a put. 
B)  purchase a call. 
C)  purchase an index option. 
D)  utilize a bearish spread. 
E)  utilize a bullish spread. 
A)  purchase a put. 
B)  purchase a call. 
C)  purchase an index option. 
D)  utilize a bearish spread. 
E)  utilize a bullish spread.

Question 10

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 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $81.25 loss 
B)  $1,606.25 gain 
C)  $1,606.25 loss 
D)  $268.75 loss 
E)  $268.75 gain 
A)  $81.25 loss 
B)  $1,606.25 gain 
C)  $1,606.25 loss 
D)  $268.75 loss 
E)  $268.75 gain

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. A long strap 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 12

The entity that acts as the guarantor of each CBOE-traded contract is the

Accepted Answer

A)  Federal Government. 
B)  Securities and Exchange Commission. 
C)  CBOE. 
D)  Options Clearing Corporation. 
E)  Federal Reserve Bank. 
A)  Federal Government. 
B)  Securities and Exchange Commission. 
C)  CBOE. 
D)  Options Clearing Corporation. 
E)  Federal Reserve Bank.

Question 13

Options on futures contracts are very popular because

Accepted Answer

A)  they require the holder to purchase at a future date. 
B)  of their ability to create leverage. 
C)  the seller of the futures contract is under no obligation. 
D)  the amount of the underlying commodity is negotiable. 
E)  None of these are correct. 
A)  they require the holder to purchase at a future date. 
B)  of their ability to create leverage. 
C)  the seller of the futures contract is under no obligation. 
D)  the amount of the underlying commodity is negotiable. 
E)  None of these are correct.

Question 14

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, and a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25 percent or fall by 25 percent. The one-year, risk-free rate is 2 percent.
-Refer to Exhibit 16.5. Calculate the price of the call option today (C0).

Accepted Answer

A)  $7.56 
B)  $17.48 
C)  $9.26 
D)  $5.0 
E)  $17.15 
A)  $7.56 
B)  $17.48 
C)  $9.26 
D)  $5.0 
E)  $17.15

Question 15

Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $65.

Accepted Answer

A)  $71.75 
B)  $76.75 
C)  $58.25 
D)  $81.75 
E)  $85.25 
A)  $71.75 
B)  $76.75 
C)  $58.25 
D)  $81.75 
E)  $85.25

Question 16

Index options are settled by delivery of the stocks that make up the index.

Accepted Answer

A) True 
 B)False

Question 17

Convertibles provide the upside potential of common stock and the downside protection of a bond.

Accepted Answer

A) True 
 B)False

Question 18

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

Accepted Answer

A) True 
 B)False

Question 19

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 16.8. If you establish a long strip using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $256.25 loss 
B)  $256.25 gain 
C)  $925.00 loss 
D)  $668.75 gain 
E)  $668.75 loss 
A)  $256.25 loss 
B)  $256.25 gain 
C)  $925.00 loss 
D)  $668.75 gain 
E)  $668.75 loss

Question 20

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, and a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25 percent or fall by 25 percent. The one-year, risk-free rate is 2 percent.
-Refer to Exhibit 16.5. Calculate the possible prices of the stock one year from today.

Accepted Answer

A)  $37.50 or $17.50. 
B)  $62.50 or $37.50. 
C)  $62.50 or $17.50. 
D)  $50 or $45. 
E)  None of the above. 
A)  $37.50 or $17.50. 
B)  $62.50 or $37.50. 
C)  $62.50 or $17.50. 
D)  $50 or $45. 
E)  None of the above.

The issuance of convertibles will ultimately lead to greater dilution than an initial issue of stock.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

If the hedge ratio is 0.50, this indicates that the portfolio should hold

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. How much must an investor pay for one call option contract?

The conversion price parity for a convertible bond is defined as

In the Black-Scholes option pricing model, an increase in security volatility ( $\sigma$ ) will cause

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?

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) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

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 long strap is an appropriate strategy if

The entity that acts as the guarantor of each CBOE-traded contract is the

Options on futures contracts are very popular because

Index options are settled by delivery of the stocks that make up the index.

Convertibles provide the upside potential of common stock and the downside protection of a bond.

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 95 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 issuance of convertibles will ultimately lead to greater dilution than an initial issue of stock.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

If the hedge ratio is 0.50, this indicates that the portfolio should hold

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. How much must an investor pay for one call option contract?

The conversion price parity for a convertible bond is defined as

In the Black-Scholes option pricing model, an increase in security volatility ( σ\sigmaσ ) will cause

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?

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) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

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 long strap is an appropriate strategy if

The entity that acts as the guarantor of each CBOE-traded contract is the

Options on futures contracts are very popular because

Index options are settled by delivery of the stocks that make up the index.

Convertibles provide the upside potential of common stock and the downside protection of a bond.

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 95 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

In the Black-Scholes option pricing model, an increase in security volatility ( $\sigma$ ) will cause