Deck 14: Options Markets and Trading

Question 1

The following was NOT associated with Russell Sage's extensive financial operations during the late nineteenth-century New York:

A) a clearinghouse
B) dividend adjustments
C) dual trading and manipulation
D) the importance of collateral
E) put-call parity

Answer 1

A

Question 2

Suppose the price of gold in the spot market is $1,830 and the price of a put option on gold futures with a strike price of $1,840 is $55 (all prices are per ounce).If you exercise this put option,you get:

A) $10 and a long position in gold futures
B) $45 and a long position in gold futures
C) $10 and a short position in gold futures
D) $30 and a short position in gold futures
E) $45 and a short position in gold futures

Answer 2

C

Question 3

Buyers of options maturing in more than nine months can borrow up to 25 percent of the purchase price,while buyers of shorter maturity options must keep the full purchase price in their margin accounts.If you are buying two contracts of a put option maturing in six months for $6 and three contracts of a call option maturing in ten months for $4,then the minimum amount that you must keep in the margin account is:

A) $900
B) $1,200
C) $2,100
D) $2,400
E) None of these answers are correct.

Answer 3

C

Question 4

Many major developments took place in the exchange-traded options market during 1975-85.They do NOT include the:

A) establishment of the Options Clearing Corporation
B) introduction of exchange-traded put options
C) opening of the Chicago Board Options Exchange
D) introduction of exchange-traded currency options
E) introduction of exchange-traded options on bond futures

Question 5

For computing position limits,the following positions are considered to be on the same side of the market:

A) long call and long put with the same strike price
B) short call and long put
C) short call and short put
D) short call and a long call with a higher strike price
E) None of these answers are correct.

Question 6

Option contracts did NOT trade in:

A) seventeenth-century Amsterdam,Netherlands
B) the Dojima Rice Exchange,Osaka,Japan
C) nineteenth-century London,Great Britain
D) nineteenth-century New York City,USA
E) the Chicago Board Options Exchange,USA

Question 7

Regular equity options that expire each month belong to quarterly "cycles." For example,IBM has a January cycle,Hewlett Packard has a February cycle,and Wal-Mart has a March cycle.At any time,options trade which expire during the next two months plus the two months after the next three-month quarter quarterly cycle.
On February 28,IBM,with a January cycle,has options expiring in:

A) February,March,April,and July
B) March,April,May,June
C) March,April,July,September
D) March,April,July,October
E) March,April,July,December

Question 8

Market manipulation cases involving options do NOT include the following:

A) buying out-of-the money options and simultaneously buying the underlying shares to artificially increase the stock price so that the options end up in-the-money
B) the dividend play strategy (or dividend spread arbitrage strategy)
C) dual trading abuses
D) option pools and stock price manipulation
E) the tulip bulb price bubbles

Question 9

During the nineteenth and early twentieth century,futures trading in the United States steadily gained acceptance,while options trading stayed in the shady corners of the financial markets and was viewed with suspicion.Which of the following was NOT a reason for this development?

A) Futures contracts had a history of being developed to help farmers and purchasers hedge price risk,while options trading had no such justification.
B) Options were used for market manipulation.
C) Option contracts traded in over-the-counter markets and had substantial legal risk.
D) Option contracts were guaranteed by well-capitalized large traders.
E) Option contracts were used for speculation in the United States.

Question 10

The primary function of the Options Clearing Corporation is to:

A) regulate all options markets
B) act as a clearinghouse for exchange-traded options
C) regulate all futures markets
D) act as a clearinghouse for various over-the-counter derivatives
E) execute option trades

Question 11

Regular equity options that expire each month belong to quarterly "cycles." For example,IBM has a January cycle,Hewlett Packard has a February cycle,and Wal-Mart has a March cycle.At any time,options trade which expire during the next two months plus the two months after the next three-month quarter quarterly cycle.
On February 1,Wal-Mart with a March cycle has options expiring in:

A) February,March,April,and May
B) February,March,May,June
C) February,March,May,June
D) February,March,June,August
E) February,March,June,September

Question 12

Which of the following is NOT true about exchange-trade equity options that mature in different months?

A) They are certificateless securities trading on the CBOE,NYSE Euronext,Eurex,and other exchanges.
B) They stop trading on the third Thursday of the expiration month and expire on the following Friday afternoon.
C) Each option contract usually represents rights to 100 shares.
D) The option contract is adjusted for cash dividends.
E) Their value primarily depends on underlying instrument's price and standard deviation,time to maturity,strike price,interest rate.

Question 13

Government actual usage of derivatives does NOT include which of the following?

A) China's use of put options for defending the value of their currency during the Asian financial crisis of 1997.
B) Warrants used as part of the Troubled Asset Relief Program (TARP)by the US government in 2008.
C) Use of option pricing models in connection with warrant valuation in TARP.
D) The when-issued market for US Treasury securities.
E) The callability of US Treasury securities before 1985.

Question 14

Suppose the price of gold in the spot market is $1,830 and the price of a call option on gold futures with a strike price of $1,825 is $35 (all prices are per ounce).If you exercise this call option,you get:

A) $5 and a long position in gold futures
B) $25 and a long position in gold futures
C) $30 and a long position in gold futures
D) $5 and a short position in gold futures
E) $30 and a short position in gold futures

Question 15

Strike price intervals for equity options are set at $2.50 intervals when the stock price is between $5 and $25,$5 intervals when the stock price is between $25 and $200,and $10 intervals when the stock price is over $200.Consider a stock that had an initial public offering price of $19,which then rose and closed at its highest level $26 at the end of the day.Which full set of strike price options are traded?

A) $15,$20,$25,and $30
B) $17.50,$20,$22.50,$25,and $30
C) $17.50,$20,$22.50,$25,$27.50,and $30
D) $20,$22.50,$25,and $30
E) $20,$25,$30,and $35

Question 16

Your Beloved Machine's current stock price is $96.If YBM December 90 calls trade for $6 and the stock has a 3 for 2 split,then the following will happen:

A) an investor holding two shares now owns three shares,the new share price is $64,the new strike price is $60,and each contract has 150 shares
B) an investor owns the same number of shares,the new share price is $64,the new strike price is $60,and each contract has 100 shares
C) an investor holding two shares now owns three shares,the new share price is $144,the new strike price is $60,and each contract has 66 shares
D) an investor holding two shares now owns three shares,the new share price is $60,the new strike price is $60,and each contract has 150 shares
E) None of these answers are correct.

Question 17

Peter owns two call options on Your Beloved Machine that expire on the third Friday of March and have an exercise price of $90.After a 3 for 1 split,he holds _______ YBM March ______ calls.

A) 2,60
B) 2,90
C) 6,90
D) 6,30
E) None of these answers are correct.

Question 18

State the dollar amount of margin you are required to keep with a broker when selling two call options on Your Beloved Machine with strike price $105 when the current stock price of YBM is $104,the call price is $4,and each call is on 100 shares.The rule for margin (borrowing)requirement for option writing as set by the Federal Reserve Bank is as follows: for writers of call options on equity and "narrow-based index," the margin account initial requirement is 100 percent of option proceeds plus 20 percent of underlying security/index value less out-of-the-money amount,if any,to a minimum of option proceeds plus 10 percent of underlying security/index value for calls.

A) $2,080
B) $2,880
C) $4,160
D) $4,760
E) None of these answers are correct.

Question 19

The following was NOT a characteristic of the financial markets in Amsterdam during the sixteenth and seventeenth centuries:

A) clearinghouse facilities
B) commodity price manipulation
C) credit risk
D) foreign exchange transactions
E) price transparency