Deck 17: Derivative Markets and Securities

Question 1

A call option differs from a put option in that

A) a call option obliges the investor to purchase a given number of shares in a specific common stock at a set price; a put obliges the investor to sell a certain number of shares in a common stock at a set price.
B) both give the investor the opportunity to participate in stock market dealings without the risk of actual stock ownership.
C) a call option gives the investor the right to purchase a given number of shares of a specified stock at a set price; a put option gives the investor the right to sell a given number of shares of a stock at a set price.
D) a put option has risk, since leverage is not as great as with a call.
E) none of the above.

Answer 1

C

Question 2

Which of the following factors is not considered in the valuation of call and put options?

A) Current stock price
B) Exercise price
C) Market interest rate
D) Volatility of underlying stock price
E) None of the above (that is, all are factors which should be considered in the valuation of call and put options)

Answer 2

E

Question 3

A vertical spread involves buying and selling call options in the same stock with

A) the same time period and exercise price.
B) the same time period but different exercise price.
C) a different time period but same exercise price.
D) a different time period and different price.
E) quotes in different options markets.

Answer 3

B

Question 4

Which of the following statements is false?

A) Derivatives help shift risk from risk-adverse investors to risk-takers.
B) Derivatives assist in forming cash prices.
C) Derivatives provide additional information to the market.
D) In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market.
E) None of the above (that is, all are reasons).

Question 5

A buyer of the call option is speculating on the

A) direction of the price movement of the underlying investment.
B) timing of the price movement of the underlying investment.
C) leverage that a call option creates with respect to the underlying investment.
D) all of the above.
E) none of the above.

Question 6

An equity portfolio manager can neutralise the risk of falling stock prices by entering into a hedge position where the payoffs are

A) not correlated with the existing exposure.
B) positively correlated with the existing exposure.
C) negatively correlated with the existing exposure.
D) any of the above.
E) none of the above.

Question 7

Which of the following is consistent with put-call-spot parity?

A) S + C = P + X/(1 + RFR)
B) S + P = C + X/(1 + RFR)
C) S − C = P + X/(1 + RFR)
D) S − P = C + X/(1 + RFR)
E) S = P − C + X/(1 + RFR)

Question 8

A stock currently sells for £75 per share. A call option on the stock with an exercise price £70 currently sells for £5.50. The call option is

A) at-the-money.
B) in-the-money.
C) out-of-the-money.
D) at breakeven.
E) none of the above.

Question 9

Futures differ from forward contracts because

A) futures have more liquidity risk.
B) futures have more credit risk.
C) futures have more maturity risk.
D) all of the above.
E) none of the above.

Question 10

You own a stock that has risen from €10 per share to €32 per share. You wish to delay taking the profit but you are troubled about the short run behaviour of the stock market. An effective action on your part would be to

A) buy a put option on the stock.
B) write a call option on the stock.
C) purchase an index option.
D) utilise a bearish spread.
E) utilise a bullish spread.

Question 11

Futures contracts are similar to forward contracts in that they both

A) have volatile price movements and strong interest from buyers and sellers.
B) give the holder the option to make a transaction in the future.
C) have similar liquidity.
D) have similar credit risk.
E) none of the above.

Question 12

The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)

A) Max [0, V − X]
B) Max [0, X − V]
C) Min [0, V − X]
D) Min [0, X − V]
E) Max [0, V > X]

Question 13

The price paid for the option contract is referred to as the

A) forward price.
B) exercise price.
C) striking price.
D) option premium.
E) call price.

Question 14

Which of the following statements is true?

A) The buyer of a futures contract is said to be long futures.
B) The seller of a futures contract is said to be short futures.
C) The seller of a futures contract is said to be long futures.
D) The buyer of a futures contract is said to be short futures.
E) Choices a and b

Question 15

In the valuation of an option contract, the following statements apply except

A) the value of an option increases with its maturity.
B) there is a negative relationship between the market interest rate and the value of a call option.
C) the value of a call option is negatively related to its exercise price.
D) the value of a call option is positively related to the volatility of the underlying asset.
E) the value of a call option is positively related to the price of the underlying stock.