Question 1

Datacorp stock currently trades at $50.August call options on the stock with a strike price of $55 are priced at $5.75.October call options with a strike price of $55 are priced at $6.25.Calculate the value of the time premium between the August and October options.

Accepted Answer

A)  -$0.50 
B)  $0 
C)  $0.50 
D)  $5 
E)  -$5

Question 2

A stock currently sells for $75 per share.A put option on the stock with an exercise price $70 currently sells for $0.50.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 3

Futures differ from forward contracts because

Accepted Answer

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 4

The minimum value of an option is zero.

Accepted Answer

A) True 
 B)False

Question 5

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)

Accepted Answer

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 6

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 7

A call option in which the stock price is higher than the exercise price is said to be

Accepted Answer

A)  At-the-money. 
B)  In-the-money. 
C)  Before-the-money. 
D)  Out-of-the-money. 
E)  Above-the-money.

Question 8

The derivative based strategy known as portfolio insurance involves

Accepted Answer

A)  The sale of a put option on the underlying security position. 
B)  The purchase of a put on the underlying security position. 
C)  The sale of a call on the underlying security position. 
D)  The purchase of a call on the underlying security position. 
E)  b and d.

Question 9

Assume that you purchased shares of a stock at a price of $35 per share.At this time you wrote a call option with a $35 strike and received a call price of $2.The stock currently trades at $70.Calculate the dollar return on this option strategy.

Accepted Answer

A)  $25 
B)  -$2 
C)  $2 
D)  -$25 
E)  $0

Question 10

A one year call option has a strike price of 50,expires in 6 months,and has a price of $5.04.If the risk free rate is 5%,and the current stock price is $50,what should the corresponding put be worth?

Accepted Answer

A)  $3.04 
B)  $4.64 
C)  $6.08 
D)  $3.83 
E)  $0

Question 11

Exhibit 20.7
Use the Information Below for the Following Problem(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
\$ 45 & \$ 1.50 & \$ 6.75 \
\$ 50 & \$ 3.75 & \$ 4.25
\end{array}$$
-Refer to Exhibit 20.7.The time premium for the put option with a $45 exercise price is

Accepted Answer

A)  $0.00 
B)  $1.50 
C)  $2.75 
D)  $5.25 
E)  $6.50

Question 12

The option premium is the price the call buyer will pay to the option seller if the option is exercised.

Accepted Answer

A) True 
 B)False

Question 13

A stock currently trades at $110.June call options on the stock with a strike price of $105 are priced at $4.Calculate the arbitrage profit that you can earn.

Accepted Answer

A)  $0 
B)  $1 
C)  $5 
D)  $4 
E)  None of the above

Question 14

A forward contract gives its holder the option to conduct a transaction involving another security or commodity.

Accepted Answer

A) True 
 B)False

Question 15

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 behavior of the stock market.An effective action on your part would be to

Accepted Answer

A)  Buy a put option on the stock. 
B)  Write a call option on the stock. 
C)  Purchase an index option. 
D)  Utilize a bearish spread. 
E)  Utilize a bullish spread.

Question 16

A buyer of the call option is speculating on the

Accepted Answer

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 17

If an investor wants to acquire the right to buy or sell an asset,but not the obligation to do it,the best instrument is an option rather than a futures contract.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Which of the following statements is true?

Accepted Answer

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 20

Exhibit 20.7
Use the Information Below for the Following Problem(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the following put and call option prices with exercise prices at $45 and $50.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
\$ 45 & \$ 1.50 & \$ 6.75 \
\$ 50 & \$ 3.75 & \$ 4.25
\end{array}$$
-Refer to Exhibit 20.7.The time premium for the call option with a $50 exercise price is

Accepted Answer

A)  $0.00 
B)  $1.50 
C)  $1.75 
D)  $4.25 
E)  $9.25

Exam 20: An Introduction to Derivative Markets and Securities

Datacorp stock currently trades at $50.August call options on the stock with a strike price of $55 are priced at $5.75.October call options with a strike price of $55 are priced at $6.25.Calculate the value of the time premium between the August and October options.

A stock currently sells for $75 per share.A put option on the stock with an exercise price $70 currently sells for $0.50.The put option is

Futures differ from forward contracts because

The minimum value of an option is zero.

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 call option in which the stock price is higher than the exercise price is said to be

The derivative based strategy known as portfolio insurance involves

Assume that you purchased shares of a stock at a price of $35 per share.At this time you wrote a call option with a $35 strike and received a call price of $2.The stock currently trades at $70.Calculate the dollar return on this option strategy.

A one year call option has a strike price of 50,expires in 6 months,and has a price of $5.04.If the risk free rate is 5%,and the current stock price is $50,what should the corresponding put be worth?

The option premium is the price the call buyer will pay to the option seller if the option is exercised.

A stock currently trades at $110.June call options on the stock with a strike price of $105 are priced at $4.Calculate the arbitrage profit that you can earn.

A forward contract gives its holder the option to conduct a transaction involving another security or commodity.

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 behavior of the stock market.An effective action on your part would be to

A buyer of the call option is speculating on the

If an investor wants to acquire the right to buy or sell an asset,but not the obligation to do it,the best instrument is an option rather than a futures contract.

Which of the following statements are true?

Which of the following statements is true?