Question 1

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Accepted Answer

A) True 
 B)False

Question 2

Three types of equity securities derivatives are:

Accepted Answer

A)  puts and calls created by corporations, and warrants created by investors. 
B)  puts and calls created by investors, and warrants created by corporations. 
C)  options, preferred stock, and commons stock created by corporations. 
D)  options, stock, and warrants, created by corporations. 
A)  puts and calls created by corporations, and warrants created by investors. 
B)  puts and calls created by investors, and warrants created by corporations. 
C)  options, preferred stock, and commons stock created by corporations. 
D)  options, stock, and warrants, created by corporations.

Question 3

Which of the following statements is TRUE?

Accepted Answer

A)  An American option's premium almost never declines below its intrinsic value. 
B)  If a call is in the money, its intrinsic value equals zero. 
C)  The speculative premium reflects the option's immediate value. 
D)  If the exercise price of an put is less than the stock price, the put is "out of the money." 
A)  An American option's premium almost never declines below its intrinsic value. 
B)  If a call is in the money, its intrinsic value equals zero. 
C)  The speculative premium reflects the option's immediate value. 
D)  If the exercise price of an put is less than the stock price, the put is "out of the money."

Question 4

An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

Accepted Answer

A) True 
 B)False

Question 5

The writer of a naked call faces

Accepted Answer

A)  an unlimited potential loss. 
B)  a specified potential loss. 
C)  no chance of loss because this is a conservative strategy. 
D)  an unlimited potential gain. 
A)  an unlimited potential loss. 
B)  a specified potential loss. 
C)  no chance of loss because this is a conservative strategy. 
D)  an unlimited potential gain.

Question 6

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Accepted Answer

Put and call options offer leverage comp

Question 7

Which of the following statements is true regarding American and European options?

Accepted Answer

A)  American options can be exercised only at expiration. 
B)  American options can be exercised only in the last week prior to expiration. 
C)  European options can be exercised only at expiration. 
D)  European options can be exercised any time prior to expiration. 
A)  American options can be exercised only at expiration. 
B)  American options can be exercised only in the last week prior to expiration. 
C)  European options can be exercised only at expiration. 
D)  European options can be exercised any time prior to expiration.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A)  An in-the-money call occurs if the stock price exceeds the exercise price. 
B)  An out-of -the money call occurs if the stock price is less than the exercise price. 
C)  If a call is out of the money, the intrinsic value is zero. 
D)  If a call is in the money, the intrinsic value is zero. 
A)  An in-the-money call occurs if the stock price exceeds the exercise price. 
B)  An out-of -the money call occurs if the stock price is less than the exercise price. 
C)  If a call is out of the money, the intrinsic value is zero. 
D)  If a call is in the money, the intrinsic value is zero.

Question 9

LEAPS are typically:

Accepted Answer

A)  more expensive than short-term options. 
B)  cheaper than short-term options. 
C)  only available for major indexes, not individual stocks. 
D)  long-term options, with maturities often between 5 and 10 years. 
A)  more expensive than short-term options. 
B)  cheaper than short-term options. 
C)  only available for major indexes, not individual stocks. 
D)  long-term options, with maturities often between 5 and 10 years.

Question 10

To maximize his/her expected returns, ceteris paribus, an investor who was bearish on a particular stock would execute which of the following options strategies:

Accepted Answer

A)  buy calls 
B)  write calls 
C)  buy puts 
D)  write puts 
A)  buy calls 
B)  write calls 
C)  buy puts 
D)  write puts

Question 11

A combination of one put and one call on the same stock with the same exercise price and date is known as a:

Accepted Answer

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

Question 12

What is the put-call parity? How is it related to arbitrage?

Accepted Answer

This principle expresses the relationshi

Question 13

What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?

Accepted Answer

Price of underlying stock. The higher th

Question 14

Which of the following statements is true regarding equity options contracts?

Accepted Answer

A)  The majority of options contracts are standardized, including strike prices and time to maturity. 
B)  Investors typically create options contracts to trade amongst themselves. 
C)  Options contracts are typically customized to suit the needs of each investor. 
D)  Options are available on all publicly traded U.S. stocks 
A)  The majority of options contracts are standardized, including strike prices and time to maturity. 
B)  Investors typically create options contracts to trade amongst themselves. 
C)  Options contracts are typically customized to suit the needs of each investor. 
D)  Options are available on all publicly traded U.S. stocks

Question 15

In the Black-Scholes model,

Accepted Answer

A)  all of the inputs except two are observable. 
B)  all of the inputs except one are observable. 
C)  the greater the stock price, the lower the price of the call option. 
D)  there is an inverse relationship between the value of a call and interest rates in the market. 
A)  all of the inputs except two are observable. 
B)  all of the inputs except one are observable. 
C)  the greater the stock price, the lower the price of the call option. 
D)  there is an inverse relationship between the value of a call and interest rates in the market.

Question 16

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

-The closest quote for the Dec. 25 call, were it to trade, would be

Accepted Answer

A)  12. Solution: Intrinsic value =38 5/8 - 25 
B)  4 7/8. =13 5/8 
C)  10 1/2. 
D)  13 5/8. 
A)  12. Solution: Intrinsic value =38 5/8 - 25 
B)  4 7/8. =13 5/8 
C)  10 1/2. 
D)  13 5/8.

Question 17

One important reason for the existence of derivatives is that they:

Accepted Answer

A)  help lower transactions costs. 
B)  have valuable tax benefits. 
C)  contribute to market completeness. 
D)  are risk-free. 
A)  help lower transactions costs. 
B)  have valuable tax benefits. 
C)  contribute to market completeness. 
D)  are risk-free.

Question 18

What is meant by portfolio insurance?

Accepted Answer

Portfolio insurance involves strategies

Question 19

Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate of return is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.

Accepted Answer

@#IMG-DLM& N(d₁) = 0.7088 (from standard

Question 20

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

-Of the various combinations shown above, how many combinations of put contracts are currently trading "out-of-the-money?"

Accepted Answer

A)  6 
B)  5 
C)  4 
D)  1 
A)  6 
B)  5 
C)  4 
D)  1

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Three types of equity securities derivatives are:

Which of the following statements is TRUE?

An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

The writer of a naked call faces

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Which of the following statements is true regarding American and European options?

Which of the following statements is FALSE?

LEAPS are typically:

To maximize his/her expected returns, ceteris paribus, an investor who was bearish on a particular stock would execute which of the following options strategies:

A combination of one put and one call on the same stock with the same exercise price and date is known as a:

What is the put-call parity? How is it related to arbitrage?

What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?

Which of the following statements is true regarding equity options contracts?

In the Black-Scholes model,

One important reason for the existence of derivatives is that they:

What is meant by portfolio insurance?

Use the Black-Scholes model to calculate the theoretical value of a DBA December 45 call option. Assume that the risk free rate of return is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $50 in the market.

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Asset Pricing Principles

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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Exam 19: Understanding Derivative Securities: Options

A protective put is a strategy in which an investor with a long position in stock buys one or more puts.

Three types of equity securities derivatives are:

Which of the following statements is TRUE?

An option buyer has three courses of action available: write a similar option to close the position, exercise the option, or let the option expire unexercised.

The writer of a naked call faces

What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?

Which of the following statements is true regarding American and European options?

Which of the following statements is FALSE?

LEAPS are typically:

To maximize his/her expected returns, ceteris paribus, an investor who was bearish on a particular stock would execute which of the following options strategies:

A combination of one put and one call on the same stock with the same exercise price and date is known as a:

What is the put-call parity? How is it related to arbitrage?

What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?

Which of the following statements is true regarding equity options contracts?

In the Black-Scholes model,

One important reason for the existence of derivatives is that they:

What is meant by portfolio insurance?

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Asset Pricing Principles

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

Filters