Question 1

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk free bond has a price of $30. Calculate the price of the January put option.

Accepted Answer

A)  $11
B)  $24
C)  $19
D)  $30
E)  $25 A

Question 2

All features of a forward contract are standardized, except for price and number of contracts.

Accepted Answer

A) True 
 B)False  False

Question 3

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

Accepted Answer

A)  $10
B)  $50
C)  $55
D)  -$10
E)  $0 E

Question 4

Exhibit 20.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 20.5. If at expiration Peppy is selling for $47.00, what is Sarah's dollar gain or loss?

Accepted Answer

A)  $25 loss
B)  $250 loss
C)  $25 gain
D)  $250 gain
E)  None of the above

Question 5

A stock currently sells for $15 per share. A put option on the stock with an exercise price $20 currently sells for $6.50. The put option is

Accepted Answer

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

Question 6

Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

Accepted Answer

A)  $3
B)  -$2
C)  $2
D)  -$3
E)  $0

Question 7

The price at which the stock can be acquired or sold is the exercise price.

Accepted Answer

A) True 
 B)False

Question 8

The minimum value of an option is zero.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements are true?

Accepted Answer

A)  Futures contracts have less liquidity risk and credit risk than forward contracts.
B)  Futures contract prices are strongly linked to the prevailing level of the underlying spot index.
C)  Futures contract decrease in price, the further forward in time the delivery date is set.
D)  All of the above.
E)  None of the above.

Question 10

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

Accepted Answer

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.

Question 11

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Accepted Answer

A)  $25
B)  $35
C)  $0
D)  -$10
E)  $10

Question 12

Exhibit 20.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The current value of the S&P 500 stock index is 1178.
-Refer to Exhibit 20.1. How much must you deposit in a margin account if you wish to purchase one contract?

Accepted Answer

A)  $267,232.5
B)  $29,450
C)  $29,692.50
D)  $30,000
E)  $265,050

Question 13

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

Accepted Answer

A)  $15
B)  $55
C)  $35
D)  -$15
E)  $0

Question 14

Exhibit 20.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common stock selling at $37 1/2 per share and also considering an Olivia option. $$\begin{array} { l c c c c } 
& { \text { Calls } } && { \text { Puts } } \
\text { Price } & \text { December } & \text { March } & \text { December } & \text { March } \
\hline 35 & 33 / 4 & 5 & 11 / 4 & 2 \
40 & 21 / 2 & 31 / 2 & 41 / 2 & 43 / 4
\end{array}$$
-Refer to Exhibit 20.3. If Bruce decides to buy a March call option with an exercise price of 35, what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?

Accepted Answer

A)  $225.00 loss
B)  $350.00 loss
C)  $225.00 gain
D)  $350.00 gain
E)  $850.00 gain

Question 15

A one year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk free rate is 3%, and the current stock price is $45, what should the corresponding put be worth?

Accepted Answer

A)  $12.74
B)  $10.48
C)  $5.00
D)  $9.00
E)  $8.30

Question 16

An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put.

Accepted Answer

A) True 
 B)False

Question 17

Exhibit 20.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10%.
-Refer to Exhibit 20.2. If the futures contract is quoted at 105:08 at expiration calculate the percentage return.

Accepted Answer

A)  1.99%
B)  19.99%
C)  20.62%
D)  25.37%
E)  -13.65%

Question 18

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk free bond.

Accepted Answer

A)  $120
B)  $15
C)  $105
D)  $116
E)  $104

Question 19

A cash or spot contract is an agreement for the immediate delivery of an asset such as the purchase of stock on the NYSE.

Accepted Answer

A) True 
 B)False

Question 20

There are a number of differences between forward and futures contracts. Which of the following statements is false?

Accepted Answer

A)  Futures have less liquidity risk than forward contracts.
B)  Futures have less credit risk than forward contracts.
C)  Futures have more default risk than forward contracts.
D)  In futures, the exchange becomes the counterparty to all transactions.
E)  None of the above (that is, all statements are true)

Exam 20: An Introduction to Derivative Markets and Securities

A stock currently trades for $25. January call options with a strike price of $30 sell for $6. The appropriate risk free bond has a price of $30. Calculate the price of the January put option.

All features of a forward contract are standardized, except for price and number of contracts.

Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

A stock currently sells for $15 per share. A put option on the stock with an exercise price $20 currently sells for $6.50. The put option is

Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

The price at which the stock can be acquired or sold is the exercise price.

The minimum value of an option is zero.

Which of the following statements are true?

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

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Consider a stock that is currently trading at $20. Calculate the intrinsic value for a put option that has an exercise price of $35.

A one year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk free rate is 3%, and the current stock price is $45, what should the corresponding put be worth?

An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put.

A stock currently trades for $115. January call options with a strike price of $100 sell for $16, and January put options a strike price of $100 sell for $5. Estimate the price of a risk free bond.

A cash or spot contract is an agreement for the immediate delivery of an asset such as the purchase of stock on the NYSE.

There are a number of differences between forward and futures contracts. Which of the following statements is false?