Question 1

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)  Choices c and d. 
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)  Choices c and d.

Question 2

Exhibit 13-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. $\begin{array}{ccc}
\text { Exercise Price } & \text { Put Price } & \text { Call Price } \
\hline50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$
-Refer to Exhibit 13-6. What should the price be of a call option that expires 6 month from today with a exercise price of $55?

Accepted Answer

A)  $1.33 
B)  $3.08 
C)  $4.58 
D)  $6.07 
E)  $6.33 
A)  $1.33 
B)  $3.08 
C)  $4.58 
D)  $6.07 
E)  $6.33

Question 3

Which of the following factors is not considered in the valuation of call and put options?

Accepted Answer

A)  Current stock price 
B)  Exercise price 
C)  Market interest rate 
D)  Volatility of underlying stock price 
E)  None of the above (that is, all are factors which should be considered in the valuation of call and put options) 
A)  Current stock price 
B)  Exercise price 
C)  Market interest rate 
D)  Volatility of underlying stock price 
E)  None of the above (that is, all are factors which should be considered in the valuation of call and put options)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 13-9
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
Consider the following information on put and call options for Bank of Montreal
 $\begin{array}{ccc}
\text { Strike Price } & \text { Put Price } & \text { Call Price } \
\hline \$ 32.50 & \$ 2.85 & \$ 1.65
\end{array}$
-Refer to Exhibit 13-9. Calculate the net value of a protective put position 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 6

Exhibit 13-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
\quad\quad\quad\quad\text { XYZ CORP }\
\begin{array}{cccc}
\hline  &{ \quad\quad\quad\text { EXERCISE } } & & { \quad\quad\quad\text { NYSE } } \
\hline&\text { DATE } & \text { PRICE } & \text { PRICE } & \text { CLOSE } \
\hline \text {CALLS  } & \text { OCT } & 85 & 163 / 4 & 10111 / 16 \
&\text { OCT } & 90 & 12 & 10111 / 16 \
&\text { OCT } & 95 & 75 / 8 & 10111 / 16 \
 \text { PUTS } &\text { OCT } & 85 & 1 / 8 & 10111 / 16 \
&\text { OCT } & 90 & 3 / 8 & 10111 / 16 \
&\text { OCT } & 95 & 13 / 16 & 10111 / 16
\end{array}\end{array}$
-Refer to Exhibit 13-8. If you establish a long strip using the options with an 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Accepted Answer

A)  $106.25 gain 
B)  $106.25 loss 
C)  $1,275.00 loss 
D)  $1,275.00 gain 
E)  $75.00 loss 
A)  $106.25 gain 
B)  $106.25 loss 
C)  $1,275.00 loss 
D)  $1,275.00 gain 
E)  $75.00 loss

Question 7

Exhibit 13-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an initial margin of 10% on futures contracts. The current value of the S&P 500 stock index is 1178.
-Refer to Exhibit 13-1. How much must you deposit in a margin account if you wish to purchase one contract?

Accepted Answer

A)  $267,232.5 
B)  $29,450 
C)  $29,692.50 
D)  $30,000 
E)  $265,050 
A)  $267,232.5 
B)  $29,450 
C)  $29,692.50 
D)  $30,000 
E)  $265,050

Question 8

Exhibit 13-9
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
Consider the following information on put and call options for Bank of Montreal
 $\begin{array}{ccc}
\text { Strike Price } & \text { Put Price } & \text { Call Price } \
\hline \$ 32.50 & \$ 2.85 & \$ 1.65
\end{array}$
-Refer to Exhibit 13-9. 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 9

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 10

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 11

Exhibit 13-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
\quad\quad\quad\quad\text { XYZ CORP }\
\begin{array}{cccc}
\hline  &{ \quad\quad\quad\text { EXERCISE } } & & { \quad\quad\quad\text { NYSE } } \
\hline&\text { DATE } & \text { PRICE } & \text { PRICE } & \text { CLOSE } \
\hline \text {CALLS  } & \text { OCT } & 85 & 163 / 4 & 10111 / 16 \
&\text { OCT } & 90 & 12 & 10111 / 16 \
&\text { OCT } & 95 & 75 / 8 & 10111 / 16 \
 \text { PUTS } &\text { OCT } & 85 & 1 / 8 & 10111 / 16 \
&\text { OCT } & 90 & 3 / 8 & 10111 / 16 \
&\text { OCT } & 95 & 13 / 16 & 10111 / 16
\end{array}\end{array}$
-Refer to Exhibit 13-8. 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

Question 12

A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, 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 13

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

Accepted Answer

A) True 
 B)False

Question 14

A straddle is the simultaneous purchase (or sale) of a put and call option with the same underlying asset,

Accepted Answer

A)  Same exercise price, and expiration date. 
B)  Same exercise price but different expiration date. 
C)  Same expiration date but different exercise price. 
D)  All of the above. 
E)  None of the above. 
A)  Same exercise price, and expiration date. 
B)  Same exercise price but different expiration date. 
C)  Same expiration date but different exercise price. 
D)  All of the above. 
E)  None of the above.

Question 15

Exhibit 13-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
\quad\quad\quad\quad\text { XYZ CORP }\
\begin{array}{cccc}
\hline  &{ \quad\quad\quad\text { EXERCISE } } & & { \quad\quad\quad\text { NYSE } } \
\hline&\text { DATE } & \text { PRICE } & \text { PRICE } & \text { CLOSE } \
\hline \text {CALLS  } & \text { OCT } & 85 & 163 / 4 & 10111 / 16 \
&\text { OCT } & 90 & 12 & 10111 / 16 \
&\text { OCT } & 95 & 75 / 8 & 10111 / 16 \
 \text { PUTS } &\text { OCT } & 85 & 1 / 8 & 10111 / 16 \
&\text { OCT } & 90 & 3 / 8 & 10111 / 16 \
&\text { OCT } & 95 & 13 / 16 & 10111 / 16
\end{array}\end{array}$
-Refer to Exhibit 13-8. 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 16

A stock currently sells for $75 per share. A call option on the stock with an exercise price $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)  None of the above. 
A)  At-the-money. 
B)  In-the-money. 
C)  Out-of-the-money. 
D)  At breakeven. 
E)  None of the above.

Question 17

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)  Utilize a bearish spread. 
E)  Utilize a bullish spread. 
A)  Buy a put option on the stock. 
B)  Write a call option on the stock. 
C)  Purchase an index option. 
D)  Utilize a bearish spread. 
E)  Utilize a bullish spread.

Question 18

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)  None of the above 
A)  $0 
B)  $1 
C)  $5 
D)  $4 
E)  None of the above

Question 19

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is

Accepted Answer

A)  At-the-money. 
B)  In-the-money. 
C)  Out-of-the-money. 
D)  At breakeven. 
E)  None of the above. 
A)  At-the-money. 
B)  In-the-money. 
C)  Out-of-the-money. 
D)  At breakeven. 
E)  None of the above.

Question 20

Exhibit 13-9
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
Consider the following information on put and call options for Bank of Montreal
 $\begin{array}{ccc}
\text { Strike Price } & \text { Put Price } & \text { Call Price } \
\hline \$ 32.50 & \$ 2.85 & \$ 1.65
\end{array}$
-Refer to Exhibit 13-9. A protective put 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.

The derivative based strategy known as portfolio insurance involves

Which of the following factors is not considered in the valuation of call and put options?

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

Exhibit 13-9 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Consider the following information on put and call options for Bank of Montreal Strike Price Put Price Call Price \ 32.50 \ 2.85 \ 1.65 -Refer to Exhibit 13-9. A covered call is an appropriate strategy if

A hedge strategy known as a collar agreement involves the simultaneous

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

A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, and the current stock price is $62, what should the corresponding put be worth?

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

A straddle is the simultaneous purchase (or sale) of a put and call option with the same underlying asset,

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

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

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.

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is

Exhibit 13-9 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Consider the following information on put and call options for Bank of Montreal Strike Price Put Price Call Price \ 32.50 \ 2.85 \ 1.65 -Refer to Exhibit 13-9. A protective put is an appropriate strategy if

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 13: An Introduction to Derivative Markets and Securities

The derivative based strategy known as portfolio insurance involves

Which of the following factors is not considered in the valuation of call and put options?

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

Exhibit 13-9 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Consider the following information on put and call options for Bank of Montreal Strike Price Put Price Call Price \ 32.50 \ 2.85 \ 1.65 -Refer to Exhibit 13-9. A covered call is an appropriate strategy if

A hedge strategy known as a collar agreement involves the simultaneous

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

A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, and the current stock price is $62, what should the corresponding put be worth?

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

A straddle is the simultaneous purchase (or sale) of a put and call option with the same underlying asset,

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

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

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.

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is

Exhibit 13-9 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Consider the following information on put and call options for Bank of Montreal Strike Price Put Price Call Price \ 32.50 \ 2.85 \ 1.65 -Refer to Exhibit 13-9. A protective put is an appropriate strategy if

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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