Deck 14: Options Markets

Question 1

A ____ requires a premium above and beyond the price to be paid for the financial instrument.

A)futures contract
B)call option
C)put option
D)call option AND put option

Answer 1

D

Question 2

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.

A)increases; increases
B)increases; decreases
C)limits; increases
D)limits; decreases

Answer 2

D

Question 3

Sellers (writers)of call options can close out their position at any point in time by

A)selling a put option on the same stock.
B)buying identical call options.
C)selling additional call options on the same stock.
D)selling a put option on the same stock AND buying identical call options.

Answer 3

B

Question 4

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?

A)$4 gain
B)$6 loss
C)$2 loss
D)$1 gain
E)$0

Question 5

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question 6

The ____ is the most important exchange for trading options.

A)New York Stock Exchange (NYSE)
B)Chicago Board Options Exchange (CBOE)
C)Boston Options Exchange
D)Nasdaq

Question 7

The ____, the higher the call option premium, other things being equal.

A)lower the existing price of the underlying security relative to the exercise price
B)lower the volatility of the underlying security's market price
C)longer the time to maturity of the option
D)lower the existing price of the underlying security relative to the exercise price AND  lower the volatility of the underlying security's market price

Question 8

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

A)- $4
B)- $3
C)- $2
D)$2
E)$3

Question 9

The Options Clearing Corporation (OCC)serves as a guarantor on option contracts traded in the United States.

Question 10

Put options are typically used to hedge when portfolio managers are mainly concerned about

A)a permanent decline in a stock's value.
B)a permanent increase in a stock's value.
C)a temporary decline in a stock's value.
D)a temporary increase in a stock's value.

Question 11

Assume an insurance company purchases a call option on a stock index futures contract for a premium of 14, with an exercise price of 1800. The value of a stock index futures contract is 250 times the index. If the stock index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?

A)$15,000
B)$7,500
C)$3,300
D)$4,000
E)$1,500

Question 12

The sale of a call option on a stock the seller already owns is referred to as

A)a covered call.
B)a naked call.
C)a  call on futures.
D)futures on options.

Question 13

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. ​

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question 14

When the market price of the underlying security exceeds the exercise price, a

A)call option is in the money.
B)put option is in the money.
C)call option is at the money.
D)call option is out of the money.

Question 15

A put option is "out of the money" when the

A)market price of the security exceeds the exercise price.
B)market price of the security equals the exercise price.
C)market price of the security is less than the exercise price.
D)premium on the option is less than the exercise price.

Question 16

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

A)$26
B)$34
C)$28
D)$29
E)$32

Question 17

A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain?

A)$1,968.75
B)$3,750.00
C)$3,000.00
D)- $2,000.00
E)$1,000.00

Question 18

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. ​

A)call option
B)put option
C)sale of a futures contract
D)purchase of a futures contract

Question 19

____ can execute transactions desired by investors and trade stock options for their own account.

A)Maintenance brokers
B)Discount brokers
C)Market makers
D)None of these are correct.

Question 20

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? ​

A)$50
B)$58
C)$52
D)$53
E)$49

Question 21

The premium on an existing put option should ____ when there is an increase in the volatility of the underlying stock.

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 22

When a stock index option is exercised, the cash payment is equal to a specified dollar amount multiplied by

A)the index level.
B)the exercise price.
C)the difference between the index level and the exercise price.
D)the sum of the index level and the exercise price.

Question 23

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

A)put; strengthen
B)put; weaken
C)call; strengthen
D)call; weaken
E)put; strengthen AND call; weaken

Question 24

Which of the following is  NOT  an assumption underlying the Black-Scholes option-pricing model?

A)The risk-free rate is known and constant over the life of the option.
B)The probability distribution of stock prices is lognormal.
C)Investors are risk averse and will always choose the option that involves the least risk.
D)The variability of a stock's return is constant.
E)There are no transaction costs involved in trading options.

Question 25

A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator?

A)25 percent
B)- 25 percent
C)- 3.2 percent
D)- 2.9 percent

Question 26

Speculators purchase currency ____ on currencies they expect to ____ against the dollar.

A)call options; weaken
B)put options; strengthen
C)futures; weaken
D)put options; weaken

Question 27

Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.

A)- 406.25
B)4,718.75
C)- 4,718.75
D)- 812.50
E)None of these are correct.

Question 28

The premium on an existing call option should ____ when there is an increase in the volatility of the underlying stock .

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 29

European-style stock options

A)are long-term options (at least one year until expiration at the time they are created).
B)can be exercised after the expiration date.
C)can be exercised any time until the expiration date.
D)None of these are correct.

Question 30

The premium on an existing put option should ____ when there is a reduction in the volatility of the underlying stock.

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 31

Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures (which will have a face value at maturity of $100,000)is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____.

A)2,687.50
B)- 2,687.50
C)2,375.00
D)7,437.50
E)None of these are correct.

Question 32

The premium on an existing put option should ____ when the price of the underlying stock increases.

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 33

The premium on an existing call option should ____ when there is a reduction in the volatility of the underlying stock.

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 34

Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures (which will have a face value of $100,000 at maturity)is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie's net gain from this strategy is $____.

A)- 2,687.50
B)2,687.50
C)2,375.00
D)7,437.50
E)None of these are correct.

Question 35

Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.

A)available; in numerous non-U.S. countries
B)not available; in numerous non-U.S. countries
C)available; only in the United States
D)not available; only in the United States

Question 36

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.

A)reduce
B)completely eliminate
C)have no effect on
D)increase

Question 37

If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due.

A)exercise the option; greater
B)exercise the option; lower
C)let the option expire; greater
D)let the option expire; lower
E)exercise the option; greater AND let the option expire; lower

Question 38

The premium on an existing call option should ____ when the price of the underlying stock decreases.

A)be negative
B)decline
C)increase
D)be unaffected
E)be negative AND decline

Question 39

Corporations involved in international business transactions can ____ to hedge future ____.

A)sell currency call options; payables
B)purchase currency put options; receivables
C)purchase currency call options, receivables
D)purchase currency put options, payables
E)sell currency call options; payables AND purchase currency put options; receivables

Question 40

Which of the following is NOT true regarding options and options on futures contracts?

A)The purchaser of both an option and an option on futures must pay a premium.
B)Options are available on stock indexes, but not on stock index futures.
C)The fulfillment of options on futures contracts is regulated by exchanges, while the fulfillment of options is not.
D)Options are available on stock indexes, but not on stock index futures AND t he fulfillment of options on futures contracts is regulated by exchanges, while the fulfillment of options is not.

Question 41

Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value. ​

Question 42

American-style stock options can be exercised only just before expiration. ​

Question 43

A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.

Question 44

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. ​

Question 45

Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.

Question 46

On an options exchange, most option trades are executed

A)electronically.
B)on the trading floor.
C)by personal phone call.
D)None of the above.

Question 47

An option with a higher exercise price has a higher call option premium and a lower put option premium.

Question 48

Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile.

Question 49

Options trading is regulated by the

A)Options Clearing Corporation.
B)International Securities Exchange.
C)Securities and Exchange Commission.
D)Federal Reserve.

Question 50

The longer a call option's time to maturity, the lower the call option premium, other things being equal.

Question 51

Which of the following is NOT true with respect to market makers?

A)They benefit from the spread.
B)They may earn profits when they take positions in options.
C)They are not subject to a risk of loss on their positions in options.
D)All of these are true with respect to market makers.

Question 52

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. ​

Question 53

The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option. ​

Question 54

When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."

Question 55

Which of the following can normally be found in quotations for stock options?

A)exercise price, expiration date, and implied volatility
B)exercise price, expiration date, and most recently quoted premium
C)expiration date, implied volatility, and trading volume
D)expiration date, most recently quoted premium, and implied volatility

Question 56

The results with covered call writing are better than the results without covered call writing both when the stock performs poorly and when it performs well.

Question 57

Market makers can execute stock option transactions for customers but do not trade stock options for their own account.

Question 58

Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk.

Question 59

Several call options are available for a given stock, and the risk-return potential will vary among them ​

Question 60

The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. ​

Question 61

Corporations involved in international business transactions may purchase ________   to hedge __________ denominated in a foreign currency.

A)currency put options; future receivables
B)currency call options; future payables
C)currency call options; future receivables
D)currency put options; future receivables AND  currency call options; future payables

Question 62

Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent.

A)5,300; 366
B)11,000; 27
C)- 5,000; −167
D)5,000; 167
E)None of these are correct.

Question 63

Which of the following does NOT  directly affect a call option premium?

A)volatility of the underlying instrument
B)market price of the underlying instrument
C)analyst rating of the underlying instrument
D)time to maturity of the option

Question 64

The ____ is not a factor affecting the call option premium.

A)market price of the underlying instrument (relative to the option's exercise price)
B)volatility of the underlying instrument
C)current price of futures contracts on the underlying instrument
D)time to maturity of the call option

Question 65

Speculators who anticipate a decline in interest rates may consider ________ option on Treasury bond futures.

A)purchasing a put option
B)selling a call option
C)purchasing a call option
D)None of these are correct.

Question 66

Speculators sell call options on currencies that they expect to strengthen against the dollar. ​

Question 67

The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date. ​

Question 68

A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level.

Question 69

Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium.

A)higher; higher; higher
B)higher; higher; lower
C)higher; lower; higher
D)lower; lower; higher
E)None of these are correct.