Question 1

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.
 $\begin{array}{lcccc} 
&\quad\quad\quad\quad\quad\quad\quad\quad {\text { Calls }} &&\quad\quad\quad\quad\quad\quad\quad\quad {\text { Puts }} \
\text { Price } & \text { December } & \text { March } & \text { December } & \text { March } \
\hline 35 & 3\quad3 / 4 & 5 & 1\quad1 / 4 & 2 \
40 & 2\quad1 / 2 & 3\quad1 / 2 & 4\quad1 / 2 & 4\quad3 / 4
\end{array}$
-Refer to Exhibit 20.3.If Bruce buys a March put option with an exercise price of 40,what is his dollar gain (loss)if he closes his position when the stock is selling at 43 1/2?

Accepted Answer

A)  $825.00 loss 
B)  $475.00 loss 
C)  $350.00 loss 
D)  $25.00 loss 
E)  He has a gain

Question 2

An expiration date payoff and profit diagram for forward positions illustrates

Accepted Answer

A)  Gains and losses are usually small 
B)  The payoffs to both long and short positions in the forward contract are asymmetrical around the contract price 
C)  Forward contracts are zero-sum games 
D)  Long positions benefit from falling prices 
E)  None of the above

Question 3

A hedge strategy known as a collar agreement involves the simultaneous

Accepted Answer

A)  Purchase of an in-the money put and purchase of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
B)  Sale of an out-of-the money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
C)  Purchase of an in-the money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price. 
D)  Purchase of an out-of-the money put and sale of an out-of-the-money call on the same underlying asset with same expiration date and market price. 
E)  Sale of an in-the money put and purchase of an in-the-money call on the same underlying asset with same expiration date and market price.

Question 4

The price at which a futures contract is set at the end of the day is the

Accepted Answer

A)  Stock price. 
B)  Strike price. 
C)  Maintenance price. 
D)  Settlement price. 
E)  Parity price.

Question 5

An option buyer must exercise the option on or before the expiration date.

Accepted Answer

A) True 
 B)False

Question 6

The forward market has low liquidity relative to the futures market.

Accepted Answer

A) True 
 B)False

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

A one year call option has a strike price of 70,expires in 3 months,and has a price of $7.34.If the risk free rate is 6%,and the current stock price is $62,what should the corresponding put be worth?

Accepted Answer

A)  $5.34 
B)  $8.00 
C)  $10.68 
D)  $14.33 
E)  $13.33

Question 9

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.Calculate the return on a cash investment in the S&P 500 stock index if the ending index value is 1170 over the same time period.

Accepted Answer

A)  1.87% 
B)  -0.68% 
C)  -14.90% 
D)  10.36% 
E)  None of the above

Question 10

The minimum amount that must be maintained in an account is called the maintenance margin.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 20.4
Use the Information Below for the Following Problem(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share:
 (1) Buy 500 shares, and
(2) Buy six month call options with mexercise price of 45 for $\$ 3.25$ premium
-Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a 3-month Johnson Walker put option with an exercise price of $105.00 for $20.00.What is his dollar gain if at expiration the stock is selling for $80.00 per share?

Accepted Answer

A)  $200 loss 
B)  $700 loss 
C)  $200 gain 
D)  $700 gain 
E)  None of the above

Question 12

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.What is Sarah's annualized gain/loss?

Accepted Answer

A)  60.60% gain 
B)  6.06% loss 
C)  60.60% loss 
D)  6.06% gain 
E)  None of the above

Question 13

Exhibit 20.6
Use the Information Below for the Following Problem(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-You own a call option and put option that both have the same exercise price of $50 and their respective prices are $4 and $3.The stock is currently trading at $60.Calculate the dollar return on this strategy.

Accepted Answer

A)  $1.00 
B)  $2.00 
C)  $3.00 
D)  $4.00 
E)  $5.00

Question 14

A stock currently trades at $110.June put options on the stock with a strike price of $100 are priced at $5.25.Calculate the dollar return on one put contract.

Accepted Answer

A)  -$525 
B)  $1000 
C)  $0 
D)  -$1000 
E)  $525

Question 15

Consider a stock that is currently trading at $10.Calculate the intrinsic value for a call option that has an exercise price of $15.

Accepted Answer

A)  $25 
B)  -$5 
C)  $0 
D)  $20 
E)  $5

Question 16

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 17

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 intrinsic value for the call option with a $45 exercise price is

Accepted Answer

A)  $0.00 
B)  $1.50 
C)  $5.00 
D)  $5.25 
E)  $6.75

Question 18

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.Suppose at expiration the futures contract price is 250 times the index value of 1170.Disregarding transaction costs,what is your percentage return?

Accepted Answer

A)  1.87% 
B)  -0.68% 
C)  -14.90% 
D)  10.36% 
E)  None of the above

Question 19

Exhibit 20.4
Use the Information Below for the Following Problem(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share:
 (1) Buy 500 shares, and
(2) Buy six month call options with mexercise price of 45 for $\$ 3.25$ premium
-Refer to Exhibit 20.4.Assuming no commissions or taxes,what is the annualized percentage gain if the stock is at $30 in four months and the stock was purchased?

Accepted Answer

A)  9.54% loss 
B)  95.45% loss 
C)  0.9545% gain 
D)  95.45% gain 
E)  9.54% gain

Question 20

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

Accepted Answer

A)  Forward price. 
B)  Exercise price. 
C)  Striking price. 
D)  Option premium. 
E)  Call price.

Exam 20: An Introduction to Derivative Markets and Securities

An expiration date payoff and profit diagram for forward positions illustrates

A hedge strategy known as a collar agreement involves the simultaneous

The price at which a futures contract is set at the end of the day is the

An option buyer must exercise the option on or before the expiration date.

The forward market has low liquidity relative to the futures market.

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

A one year call option has a strike price of 70,expires in 3 months,and has a price of $7.34.If the risk free rate is 6%,and the current stock price is $62,what should the corresponding put be worth?

The minimum amount that must be maintained in an account is called the maintenance margin.

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.What is Sarah's annualized gain/loss?

A stock currently trades at $110.June put options on the stock with a strike price of $100 are priced at $5.25.Calculate the dollar return on one put contract.

Consider a stock that is currently trading at $10.Calculate the intrinsic value for a call option that has an exercise price of $15.

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

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