Deck 17: Futures Markets and Risk Management

Question 1

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will.

A) increase;increase
B) decrease;increase
C) increase;decrease
D) decrease;decrease
E) cannot tell without further information

Answer 1

D

Question 2

You purchase one IBM 70 call option for a premium of $6.Ignoring transaction costs,the break-even price of the position is

A) $98
B) $64
C) $76
D) $70
E) none of these

Answer 2

C

Question 3

An American put option can be exercised

A) any time on or before the expiration date.
B) only on the expiration date.
C) any time in the indefinite future.
D) only after dividends are paid.
E) none of these.

Answer 3

A

Question 4

The maximum loss a buyer of a stock call option can suffer is equal to

A) the striking price minus the stock price.
B) the stock price minus the value of the call.
C) the call premium.
D) the stock price.
E) none of these.

Question 5

A covered call position is equivalent to a

A) long put.
B) short put.
C) long straddle.
D) vertical spread.
E) none of these.

Question 6

The potential loss for a writer of a naked call option on a stock is

A) limited
B) unlimited
C) larger the lower the stock price.
D) equal to the call premium.
E) none of these.

Question 7

The intrinsic value of an in-the-money put option is equal to

A) the stock price minus the exercise price.
B) the put premium.
C) zero.
D) the exercise price minus the stock price.
E) none of these.

Question 8

The Option Clearing Corporation is owned by

A) the Bank of Canada.
B) the exchanges on which stock options are traded.
C) the provincial securities commissions.
D) the Federal Deposit Insurance Corporation.
E) none of these.

Question 9

A European call option can be exercised

A) any time in the future.
B) only on the expiration date.
C) if the price of the underlying asset declines below the exercise price.
D) immediately after dividends are paid.
E) none of these.

Question 10

A put option on a stock is said to be out of the money if

A) the exercise price is higher than the stock price.
B) the exercise price is less than the stock price.
C) the exercise price is equal to the stock price.
D) the price of the put is higher than the price of the call.
E) the price of the call is higher than the price of the put.

Question 11

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits.

A) are;are not
B) are;are
C) are not;are
D) are not;are not
E) are always;are sometimes

Question 12

The maximum loss the writer of a stock put option can suffer is equal to

A) the put premium.
B) the striking price.
C) the stock price minus the put premium.
D) the striking price minus the put premium.
E) none of these.

Question 13

According to the put-call parity theorem,the value of a European put option on a non-dividend paying stock is equal to:

A) the call value plus the present value of the exercise price plus the stock price.
B) the call value plus the present value of the exercise price minus the stock price.
C) the present value of the stock price minus the exercise price minus the call price.
D) the present value of the stock price plus the exercise price minus the call price.
E) none of these.

Question 14

A covered call position is

A) the simultaneous purchase of the call and the underlying asset.
B) the purchase of a share of stock with a simultaneous sale of a put on that stock.
C) the short sale of a share of stock with a simultaneous sale of a call on that stock.
D) the purchase of a share of stock with a simultaneous sale of a call on that stock.
E) the simultaneous purchase of a call and sale of a put on the same stock.

Question 15

The intrinsic value of an out-of-the-money call option is equal to

A) the call premium.
B) zero.
C) the stock price minus the exercise price.
D) the striking price.
E) none of these.

Question 16

The current market price of a share of BCE stock is $50.If a call option on this stock has a strike price of $45,the call

A) is out of the money.
B) is in the money.
C) sells for a higher price than if the market price of BCE stock is $40.
D) a and c.
E) b and c.

Question 17

An American call option allows the buyer to

A) sell the underlying asset at the exercise price on or before the expiration date.
B) buy the underlying asset at the exercise price on or before the expiration date.
C) sell the option in the open market prior to expiration.
D) a and c.
E) b and c.

Question 18

Call options on RIM listed stock options are

A) issued by RIM Corporation.
B) created by investors.
C) traded on various exchanges.
D) a and c.
E) b and c.

Question 19

You write one BCE February 50 put for a premium of $5.Ignoring transactions costs,what is the breakeven price of this position?

A) $50
B) $55
C) $45
D) $40
E) none of these

Question 20

An American put option allows the holder to

A) buy the underlying asset at the striking price on or before the expiration date.
B) sell the underlying asset at the striking price on or before the expiration date.
C) potentially benefit from a stock price decrease with less risk than short selling the stock.
D) b and c.
E) a and c.

Question 21

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.What is the lowest stock price at which you can break even?

A) $101.
B) $102.
C) $103.
D) $104.
E) none of these.

Question 22

The following price quotations on TD Bank calls were taken from the Montreal Exchange website. $\begin{array}{l}\text { Stock Price}&\text { Strike Price}&\text { February }\\69.02 &68&1.72\\69.02&70&0.65\\69.02&72&0.20\end{array}$
The premium on one TD Bank 70 February call contract is

A) $6.50
B) $175.00
C) $65.00
D) $650.00
E) none of these

Question 23

The put-call parity theorem

A) represents the proper relationship between put and call prices.
B) allows for arbitrage opportunities if violated.
C) may be violated by small amounts,but not enough to earn arbitrage profits,once transaction costs are considered.
D) all of these.
E) none of these.

Question 24

Suppose the price of a share of IBM stock is $100.An April call option on IBM stock has a premium of $5 and an exercise price of $100.Ignoring commissions,the holder of the call option will earn a profit if the price of the share

A) increases to $104.
B) decreases to $90.
C) increases to $107.
D) decreases to $96.
E) none of these.

Question 25

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.The maximum potential profit of your strategy is

A) $600.
B) $500.
C) $200.
D) $300.
E) $100.

Question 26

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.The maximum loss you could suffer from your strategy is

A) $200.
B) $300.
C) zero.
D) $500.
E) none of these.

Question 27

You buy one Xerox June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3.At expiration,you break even if the stock price is equal to

A) $52.
B) $60.
C) $68.
D) both a and c.
E) none of these.

Question 28

You purchased one BCE March 50 call and sold one BCE March 55 call.Your strategy is known as

A) a long straddle.
B) a horizontal spread.
C) a vertical spread.
D) a short straddle.
E) none of these.

Question 29

Before expiration,the time value of a call option is equal to

A) zero.
B) the actual call price minus the intrinsic value of the call.
C) the intrinsic value of the call.
D) the actual call price plus the intrinsic value of the call.
E) none of these.

Question 30

A protective put strategy is

A) a long put plus a long position in the underlying asset.
B) a long put plus a long call on the same underlying asset.
C) a long call plus a short put on the same underlying asset.
D) a long put plus a short call on the same underlying asset.
E) none of these.

Question 31

You buy one Xerox June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3.Your maximum loss from this position could be

A) $500.
B) $300.
C) $800.
D) $200.
E) none of these.

Question 32

You purchased one BCE March 50 put and sold one BCE April 50 put.Your strategy is known as

A) a vertical spread.
B) a straddle.
C) a horizontal spread.
D) a collar.
E) none of these.

Question 33

All of the following factors affect the price of a stock option except

A) the risk-free rate.
B) the riskiness of the stock.
C) the time to expiration.
D) the expected rate of return on the stock.
E) none of these.

Question 34

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.If,at expiration,the price of a share of IBM stock is $103,your profit would be

A) $500.
B) $300.
C) zero.
D) $100.
E) none of these.

Question 35

Some more "traditional" assets have option-like features;some of these instruments include

A) callable bonds.
B) convertible bonds.
C) warrants.
D) a and b.
E) a,b,and c.

Question 36

You purchase one IBM March 100 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy?

A) $10,000
B) $10,600
C) $9,400
D) $9,000
E) none of these

Question 37

The value of a stock put option is positively related to the following factors except

A) the time to expiration.
B) the striking price.
C) the stock price.
D) all of these.
E) none of these.

Question 38

You purchase one September 50 put contract for a put premium of $2.What is the maximum profit that you could gain from this strategy?

A) $4,800
B) $200
C) $5,000
D) $5,200
E) None of these is correct

Question 39

Financial engineering

A) is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security.
B) primarily takes place for institutional investor.
C) primarily takes places for the individual investor.
D) a and b.
E) a and c.

Question 40

You buy one Xerox June 60 call contract and one June 60 put contract.The call premium is $5 and the put premium is $3.Your strategy is called

A) a short straddle.
B) a long straddle.
C) a horizontal straddle.
D) a covered call.
E) none of these.

Question 41

An option with an exercise price equal to the underlying asset's price is

A) worthless.
B) in the money.
C) at the money.
D) out of the money.
E) theoretically impossible.

Question 42

Describe the protective put.What are the advantages of such a strategy?

Question 43

Trading in "exotic options" takes place

A) on the New York Stock Exchange.
B) in the over-the-counter market.
C) on the American Stock Exchange.
D) in the primary marketplace.
E) none of these.

Question 44

HighFlyer Stock currently sells for $48.A one-year call option with strike price of $55 sells for $9,and the risk free interest rate is 6%.What is the price of a one-year put with strike price of $55?

A) $9.00
B) $12.89
C) $16.00
D) $18.72
E) $15.60

Question 45

A callable bond should be priced the same as

A) a convertible bond.
B) a straight bond plus a put option.
C) a straight bond plus a call option.
D) a straight bond plus warrants.
E) a straight bond.

Question 46

Exchange-traded stock options expire

A) On the first day of the expiration month.
B) On the last day of the expiration month.
C) On the 15^th day of the expiration month.
D) On the first Monday of the expiration month.
E) On the third Friday of the expiration month.

Question 47

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 700 and the index is now at 760.What will happen when you exercise the option?

A) You will have to pay $6,000.
B) You will receive $6,000.
C) You will receive $700.
D) You will receive $760.
E) You will have to pay $7,000.

Question 48

Consider a one-year maturity call option and a one-year put option on the same stock,both with striking price $100.If the risk-free rate is 5%,the stock price is $103,and the put sells for $7.50,what should be the price of the call?

A) $7.50
B) $5.60
C) $10.36
D) $12.26
E) none of these.

Question 49

Suppose that you purchased a call option on the S&P 100 index.The option has an exercise price of 680 and the index is now at 720.What will happen when you exercise the option?

A) You will have to pay $680.
B) You will receive $720.
C) You will receive $680.
D) You will receive $4,000.
E) You will have to pay $4,000.

Question 50

You purchased a call option for $3.45 seventeen days ago.The call has a strike price of $45 and the stock is now trading for $51.If you exercise the call today,what will be your holding period return? If you do not exercise the call today and it expires,what will be your holding period return?

A) 173.9%,-100%
B) 73.9%,-100%
C) 57.5%,-173.9%
D) 73.9%,-57.5%
E) 100%,-100%

Question 51

ING Stock currently sells for $38.A one-year call option with strike price of $45 sells for $9,and the risk free interest rate is 4%.What is the price of a one-year put with strike price of $45?

A) $9.00
B) $12.89
C) $16.00
D) $18.72
E) $14.26

Question 52

To the option holder,put options are worth ______ when the exercise price is higher;call options are worth ______ when the exercise price is higher.

A) more;more
B) more;less
C) less;more
D) less;less
E) It doesn't matter-they are too risky to be included in a reasonable person's portfolio.

Question 53

Derivative securities are also called contingent claims because

A) their owners may choose whether or not to exercise them.
B) a large contingent of investors holds them.
C) the writers may choose whether or not to exercise them.
D) their payoffs depend on the prices of other assets.
E) contingency management is used in adding them to portfolios.

Question 54

What happens to an option if the underlying stock has a 2-for-1 split?

A) There is no change in either the exercise price or in the number of options held.
B) The exercise price will adjust through normal market movements;the number of options will remain the same.
C) The exercise price would become half of what it was and the number of options held would double.
D) The exercise price would double and the number of options held would double.
E) There is no standard rule-each corporation has its own policy.

Question 55

Asian options differ from American and European options in that

A) they are only sold in Asian financial markets.
B) they never expire.
C) their payoff is based on the average price of the underlying asset.
D) both a and b.
E) both a and c.

Question 56

What is the Option Clearing Corporation (OCC)and how does this organization facilitate option trading?

Question 57

A collar with a net outlay of approximately zero is an options strategy that

A) combines a put and a call to lock in a price range for a security.
B) uses the gains from sale of a call to purchase a put.
C) uses the gains from sale of a put to purchase a call.
D) both a and b.
E) both a and c.

Question 58

Currency options and currency futures options have different values because

A) the payoff on the currency option depends on the exchange rate at maturity,while the currency futures option's payoff depends on the exchange rate futures price at maturity.
B) the payoff on the currency option depends on the exchange rate futures price at maturity,while the currency futures option's payoff depends on the exchange rate at maturity.
C) currency options are American while currency futures options are European.
D) currency futures options are American while currency options are European.
E) currency options are quoted in U.S.dollars while currency futures options are quoted in the foreign currency.

Question 59

Protective puts offer an advantage over stop-loss orders in that

A) the stop-loss order will be executed as soon as the stock price reaches the trigger point,without allowing for a subsequent rebound,while the put allows the holder to wait.
B) the stop-loss order is costless to place.
C) the stop-loss order may actually be executed at a price below the trigger price.
D) both a and b are true.
E) both a and c are true.

Question 60

The trading volume on the Chicago Board Options Exchange is dominated by

A) the S&P 100 index option.
B) the S&P 500 index option.
C) the Russell 2000 index option.
D) all of these.
E) both a and b.

Question 61

List two types of exotic options and describe their characteristics.

Question 62

Discuss the differences in writing covered and naked calls.Are risks involved in the two strategies similar or different? Explain.