Deck 11: Introduction to Options Markets

Question 1

When an option grants the buyer the right to purchase the designated instrument from the writer, it is referred to as a:

A) Call option.
B) Put option.
C) Long forwards.
D) Long futures.
E) None of the above.

Answer 1

Call option.

Question 2

The option premium is the:

A) Price of the option.
B) Cost of the option.
C) Value of the option.
D) All of the above.
E) None of the above.

Answer 2

All of the above.

Question 3

The maximum amount that an option buyer can lose is:

A) Unlimited.
B) Limited to the option price.
C) The bid-ask spread.
D) The initial margin.
E) None of the above.

Answer 3

Limited to the option price.

Question 4

Options offer:

A) Substantial upside return potential.
B) Substantial downside risk protection.
C) Unlimited gains and losses.
D) a and b only.
E) All of the above.

Question 5

Options may be traded either on organized exchanges, such as the Chicago Board Options Exchange, or in the:

A) Over-the-counter market.
B) Interbank market.
C) Clearinghouse.
D) a and b only.
E) None of the above.

Question 6

Options traded in the OTC market are known as:

A) Standardized options.
B) Dealer options.
C) Tailor-made options.
D) b and c only.
E) Exchange-traded options.

Question 7

A major difference between options and futures is that:

A) Options provide a symmetric risk/reward relationship.
B) Futures provide a symmetric risk/reward relationship.
C) Options provide an asymmetric risk/reward relationship.
D) Futures provide an asymmetric risk/reward relationship.
E) b and c only.

Question 8

The writer of a call option is said to be in a:

A) Long call position.
B) Short call position.
C) Long put position.
D) Short put position.
E) None of the above.

Question 9

The option price is a reflection of the option's:

A) Premium.
B) Intrinsic value.
C) Time value.
D) b and c only.
E) None of the above.

Question 10

On the expiration date, an option's time premium:

A) Exceeds its intrinsic value.
B) Equals zero.
C) Is positive.
D) Is negative.
E) None of the above.

Question 11

When an option has intrinsic value, it is said to be:

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

Question 12

As the price of the underlying asset increases, the price of a:

A) Call increase.
B) Put decreases.
C) Call decreases.
D) a and b only.
E) b and c only.

Question 13

The longer the time to expiration, the:

A) Greater the option price.
B) Lower the option price.
C) Lower the option's time value.
D) b and c only.
E) None of the above.

Question 14

The relationship between the call option price, the put option price, and the price of the underlying asset is knows as:

A) Risk/return relationship.
B) Put-call parity relationship.
C) Binomial relationship.
D) Arbitrage relationship.
E) None of the above.

Question 15

More complex OTC options are called:

A) Bermuda options.
B) Atlantic options.
C) Exotic options.
D) Plain vanilla options.
E) All of the above.

Question 16

Hedging with futures lets a market participant lock in a price and thereby eliminates:

A) Price risk.
B) Basis risk.
C) Credit risk.
D) Liquidity risk.
E) None of the above.

Question 17

A put option can be used to hedge against:

A) An increase in the price of the underlying instrument.
B) A decrease in the price of the underlying instrument.
C) A decrease in interest rates.
D) All of the above.
E) None of the above.

Question 18

There are no margin requirements for the buyer of an option once the option price has been paid in full.

Question 19

Investors can use futures to protect against symmetric risk and options to protect against asymmetric risk.

Question 20

An out-of-the-money option has no intrinsic value.

Question 21

An in-the-money option is profitable when exercised immediately.

Question 22

The greater the expected volatility of the price of the underlying asset, the less an investor would be willing to pay for the option, and the more the option writer would demand for it.

Question 23

What are the major differences between a futures contract and an options contract?

Question 24

Discuss the factors that influence the option price.

Question 25

What are the basic components of the option price?