Question 1

List five options exchanges.

Accepted Answer

Chicago Board Options Exchange

Question 2

Which of the following is true regarding option pricing:

Accepted Answer

A)  the longer the maturity of the option, the higher the premium. 
B)  the more volatile the underlying stock, the lower the premium. 
C)  option prices are less volatile than equity prices. 
D)  the shorter the maturity of the option, the higher the premium. 
A)  the longer the maturity of the option, the higher the premium. 
B)  the more volatile the underlying stock, the lower the premium. 
C)  option prices are less volatile than equity prices. 
D)  the shorter the maturity of the option, the higher the premium.

Question 3

A combination of two calls and one put is called a:

Accepted Answer

A)  strip 
B)  strap 
C)  straddle 
D)  spread 
A)  strip 
B)  strap 
C)  straddle 
D)  spread

Question 4

What is a hedge ratio?

Accepted Answer

The hedge ratio for a call is N(d₁) from

Question 5

Concerning index options, which of the following statements is FALSE?

Accepted Answer

A)  Index options appeal to speculators due to the leverage they offer. 
B)  Investors can write index options. 
C)  If exercised the holder of an index option receives the strike price. 
D)  Index options are settled in cash. 
A)  Index options appeal to speculators due to the leverage they offer. 
B)  Investors can write index options. 
C)  If exercised the holder of an index option receives the strike price. 
D)  Index options are settled in cash.

Question 6

A stock investor wants to hedge the Dell stock in his portfolio. How can he use a covered call to do this?

Accepted Answer

The investor owns the stock and will pro

Question 7

Spreads are used to:

Accepted Answer

A)  increase the return potential 
B)  circumvent option commissions 
C)  reduce risk in an option position. 
D)  all of the above are true. 
A)  increase the return potential 
B)  circumvent option commissions 
C)  reduce risk in an option position. 
D)  all of the above are true.

Question 8

A (an) ---------- seeks to earn a return without assuming risk by constructing riskless hedges.

Accepted Answer

A)  speculator 
B)  call writer 
C)  put writer 
D)  arbitrageur 
A)  speculator 
B)  call writer 
C)  put writer 
D)  arbitrageur

Question 9

$---- \text {Call} ---$ $\quad $ $\quad $$-----\text { Put }-----$ 
$\begin{array}{lllllll}
\text { Option/Strike Exp.}&&&\text {  Vol. }&\text { Last} &\text {Vol.}&\text {  Last.}\
\text { XYZ} \
385 / 8 & 25 & \text { Dec. } & -- & --- & 100 & 1 / 8 \
385 / 8 & 30 & \text { Nov. } & 250 & 8\quad3/4 & 464 & 1 / 16 \ 
385 / 8 & 30 & \text { Dec. } & --- & --- & 572 & 5 / 16 \
385 / 8 & 35 & \text { Nov. } & 154 & 4\quad1 / 2 & 1748 & 5 / 16 \
385 / 8 & 35 & \text { Dec. } & 923 & 5\quad1 / 4 & 580 & 1\quad3 / 16 \
385 / 8 & 35 & \text { Mar. } & -- & --- & 33 & 2\quad5 / 8 \
385 / 8 & 40 & \text { Nov. } & 2023 & 1\quad1 / 8 & 530 & 2\quad3 / 8
\end{array}$

-Which of the following calls is not "in-the-money?"

Accepted Answer

A)  25 Dec 
B)  30 Nov 
C)  35 Dec 
D)  40 Nov 
A)  25 Dec 
B)  30 Nov 
C)  35 Dec 
D)  40 Nov

Question 10

A stock is at $68. A two-month put (strike price = $70) is available at a $6 premium.. The intrinsic value is ___ and the time value is ____.

Accepted Answer

A)  $0 . . . $4. 
B)  $3 . . . $5. 
C)  $2 . . . $4. 
D)  $2 . . . $3. 
A)  $0 . . . $4. 
B)  $3 . . . $5. 
C)  $2 . . . $4. 
D)  $2 . . . $3.

Question 11

Options sold on exchanges are protected against

Accepted Answer

A)  stock dividends and splits. 
B)  cash dividends. 
C)  interest rate movements. 
D)  inflation. 
A)  stock dividends and splits. 
B)  cash dividends. 
C)  interest rate movements. 
D)  inflation.

Question 12

If the price of the underlying common stock is less than the exercise price of a call, it is in the money.

Accepted Answer

A) True 
 B)False

Question 13

If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

Accepted Answer

A) True 
 B)False

Question 14

To hedge a short sale, an investor could

Accepted Answer

A)  buy a call. 
B)  write a call. 
C)  buy a put. 
D)  write a put. 
A)  buy a call. 
B)  write a call. 
C)  buy a put. 
D)  write a put.

Question 15

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

Accepted Answer

All contracts are actually bou

Question 16

A call option written against stock owned by the writer is said to be

Accepted Answer

A)  naked. 
B)  in the money. 
C)  out of the money. 
D)  covered. 
A)  naked. 
B)  in the money. 
C)  out of the money. 
D)  covered.

Question 17

The exercise price on an option is also known as the:

Accepted Answer

A)  premium. 
B)  strike price. 
C)  theoretical value. 
D)  spot price. 
A)  premium. 
B)  strike price. 
C)  theoretical value. 
D)  spot price.

Question 18

The two basic spreads are the:

Accepted Answer

A)  time spread and price spread 
B)  put spread and call spread 
C)  time spread and money spread 
D)  money spread and rate spread 
A)  time spread and price spread 
B)  put spread and call spread 
C)  time spread and money spread 
D)  money spread and rate spread

Question 19

AB Flex Inc. stock is currently trading at $38. The time left until expiration of a call and put trading on AB Flex Inc.'s stock is 6 months and the strike price is $45. If the call is currently trading at $1.96 and the Treasury bill rate is 10 percent per year, what price should the put sell for?

Accepted Answer

Use put-call parity.
Price of

Question 20

Other things equal, after an option first becomes available in the market,

Accepted Answer

A)  its time value approaches zero. 
B)  its time value increases into maturity. 
C)  the volatility of the stock is negatively related to the value of the call. 
D)  if it is out of the money, it will have no time value. 
A)  its time value approaches zero. 
B)  its time value increases into maturity. 
C)  the volatility of the stock is negatively related to the value of the call. 
D)  if it is out of the money, it will have no time value.

Exam 19: Understanding Derivative Securities: Options

List five options exchanges.

Which of the following is true regarding option pricing:

A combination of two calls and one put is called a:

What is a hedge ratio?

Concerning index options, which of the following statements is FALSE?

A stock investor wants to hedge the Dell stock in his portfolio. How can he use a covered call to do this?

Spreads are used to:

A (an) ---------- seeks to earn a return without assuming risk by constructing riskless hedges.

A stock is at $68. A two-month put (strike price = $70) is available at a $6 premium.. The intrinsic value is ___ and the time value is ____.

Options sold on exchanges are protected against

If the price of the underlying common stock is less than the exercise price of a call, it is in the money.

If the price of the underlying stock equals the strike price of the call option at maturity, the call buyer has a breakeven transaction.

To hedge a short sale, an investor could

What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?

A call option written against stock owned by the writer is said to be

The exercise price on an option is also known as the:

The two basic spreads are the:

AB Flex Inc. stock is currently trading at $38. The time left until expiration of a call and put trading on AB Flex Inc.'s stock is 6 months and the strike price is $45. If the call is currently trading at $1.96 and the Treasury bill rate is 10 percent per year, what price should the put sell for?

Other things equal, after an option first becomes available in the market,

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A stock is at $68. A two-month put (strike price = $70) is available at a $6 premium.. The intrinsic value is _ and the time value is __.