Deck 20: Options

Question 1

In the options market,the right to buy an underlying asset lies with:

A) call buyers.
B) put buyers.
C) European put buyers.
D) writers of an option.

Answer 1

A

Question 2

If an option buyer wanted to decide only at the expiration date whether or not to exercise the option then and the price locked into that date,they would buy:

A) An Asian option.
B) a LEPO option.
C) a European-type option.
D) an American-type option.

Answer 2

C

Question 3

The advantages of using an American type option compared to a European type option:

A) is American options are cheaper.
B) have a longer maturity date.
C) have lower volatility.
D) can be exercised at any time up to maturity.

Answer 3

D

Question 4

In options markets the strike price is the price:

A) an option buyer pays for it.
B) an option writer receives.
C) specified in an options contract at which the buyer can buy or sell the underlying asset.
D) at which a buyer can buy or sell the option in the market.

Question 5

In a put option,the:

A) seller may choose whether to receive the underlying asset at a specified time.
B) buyer will exercise the option if the price of the underlying asset has fallen below the exercise price.
C) buyer is committed to receiving the underlying asset at a specified time.
D) seller is committed to handing over the specified asset at a specified time.

Question 6

In the option markets,the option that gives the buyer the right to buy the specified commodity or financial instrument is a/an:

A) call option.
B) put option.
C) American option.
D) Asian option.

Question 7

In the options markets,an American put option can be exercised:

A) only on the expiration date.
B) at any time up to the expiration date.
C) any time in the indefinite future.
D) only after the payment of dividends.

Question 8

In the options markets for a put option,the:

A) seller is committed to receiving the underlying asset at a specified time.
B) buyer is committed to handing over the specified asset at a specified time.
C) buyer is committed to receiving the underlying asset at a specified time.
D) seller is committed to handing over the specified asset at a specified time.

Question 9

In the options markets,an American call option should have a higher premium than the comparable European call option because:

A) it is more volatile in price.
B) it is less volatile in price.
C) it gives more flexibility to the holder.
D) a call would not be exercised unless the exercise price exceeded the share price.

Question 10

In options markets,options that give the option buyer the right to exercise the option only on the maturity date are:

A) call options.
B) put options.
C) European-type options.
D) American-type options.

Question 11

In option markets the price specified in the option contracts for calls and puts is called the:

A) market price.
B) option price.
C) strike price.
D) expected value.

Question 12

In options markets,options that give the option buyer the right to exercise the option at any time up to the maturity date are:

A) call options.
B) put options.
C) European-type options.
D) American-type options.

Question 13

A European call option can be exercised:

A) only on the expiration date.
B) at any time up to the expiration date.
C) if the price of the underlying asset falls below the exercise price.
D) immediately after the payment of dividends.

Question 14

In the options markets,for a call option,the:

A) buyer is committed to receive the underlying asset at a specified time.
B) seller is committed to deliver the specified asset at a specified time.
C) seller may choose whether or not to deliver the underlying asset at a specified time.
D) buyer will choose to exercise the option if the price of the underlying asset has fallen below the exercise price.

Question 15

In options markets,an American put option lets the buyer:

A) buy the underlying asset at the exercise price on or before the expiration date.
B) sell the underlying asset at the exercise price on or before the expiration date.
C) potentially benefit from a share decrease with less risk than selling the share short.
D) sell the underlying asset only at the contract expiration date.

Question 16

In options markets an American call option lets the buyer:

A) buy the underlying asset at the exercise price on or before the expiration date.
B) buy the underlying asset at the exercise price only on the expiration date.
C) sell the underlying asset at the exercise price on or before the contract expiration date.
D) sell the underlying asset only at the expiration date.

Question 17

In the options market the option that gives the buyer the right to sell the specified commodity or financial instrument is:

A) call option.
B) put option.
C) American option.
D) Asian option.

Question 18

An options contract:

A) is another name for a forward contract.
B) gives the right to buy or sell an underlying asset at a predetermined price by a specified time.
C) may be written for debt securities but not equities.
D) may be written for equities but not debt securities.

Question 19

In the options markets for a call option,the:

A) buyer is committed to receive the underlying asset at a specified time.
B) seller is committed to handing over the specified asset at a specified time.
C) seller may choose whether or not to deliver the underlying asset at a specified time.
D) buyer will choose to exercise the option only if the price of the underlying asset falls.

Question 20

For the buyer of an option,the premium paid for the contract represents the:

A) transaction cost.
B) maximum return.
C) largest potential loss.
D) yield.

Question 21

On the expiration date for a put option with strike price of $10.00,premium $1.50 and the current spot price of $8.00,the holder will:

A) buy the shares in the market place.
B) let the option contract lapse.
C) exercise the option.
D) make a profit of $1.50

Question 22

In options markets the fee charged by a seller of an option is called the:

A) call price.
B) futures fee.
C) market price.
D) option premium.

Question 23

The decision between selecting a future or an option:

A) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide.
B) reflects the greater risk of using options and the extra insurance benefits that options provide.
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide.
D) depends on whether the underlying instrument is an equity or debt instrument.

Question 24

On the expiration date for a call option with strike price of $10.00,premium $1.50 and the current spot price of $14.00,the holder will:

A) buy the shares in the market place.
B) let the option contract lapse.
C) exercise the option.
D) make a profit of $1.50

Question 25

What type of option will an option buyer purchase if they believe a share price will rise?

A) Call
B) Put
C) Warrant
D) Swaption

Question 26

Which of the following statements best reflects the following profit profile of an option contract?

A) The profile depicts the short call position of the option seller.
B) The profile depicts the long call position of the buyer of the option.
C) The profile depicts the short put position of the option seller.
D) The profile depicts the long put position of the buyer of the option.

Question 27

In options markets,the price paid by an option buyer to the writer of the option is the:

A) call price.
B) premium.
C) put price.
D) strike price.

Question 28

What type of option will an option buyer buy if they believe a share price will fall?

A) Call
B) Put
C) Warrant
D) Swaption

Question 29

Which of the following statements best reflects the following profit profile of an option contract?

A) The profile depicts the short call position of the option seller.
B) The profile depicts the long call position of the buyer of the option.
C) The profile depicts the short put position of the option seller.
D) The profile depicts the long put position of the buyer of the option.

Question 30

In options markets,the maximum loss a buyer of a share call option can undergo is equal to the:

A) share price minus the value of the call.
B) strike price minus the share price.
C) call premium.
D) share price.

Question 31

Which of the following is NOT true of calls and puts?

A) They are generally traded on organised exchanges.
B) They can be used to hedge a gain or prevent a loss on a stock holding.
C) They provide the buyer with an opportunity of greater profits than simply from buying and selling the underlying shares.
D) They both result in new equity capital for the company.

Question 32

Which of the following statements about option contracts is incorrect?

A) The seller of a put option loses if the spot price, plus the premium, is below the exercise price when the option is exercised.
B) The buyer of a call option benefits if the price of the spot is above the exercise price when the option is exercised.
C) The buyer of a put option gains if the price of the spot is below the exercise price when the option is exercised.
D) The seller of a call option loses if the spot price, plus the premium, is below the exercise price when the option is exercised.

Question 33

In options markets,the maximum loss a buyer of a share put option can undergo is equal to the:

A) share price minus the value of the put.
B) strike price minus the share price.
C) put premium.
D) share price.

Question 34

Which of the following statements about calls and puts is incorrect?

A) Options do not provide any funding to the company.
B) Exchange-traded options are highly standardised.
C) Options are generally issued by companies.
D) Options are generally traded on an organised exchange.

Question 35

On the expiration date for a call option with strike price of $10.00,premium $1.50 and the current spot price of $9.00,the holder will:

A) have a total loss of $2.50
B) let the option contract lapse.
C) sell the shares at $9.00
D) close it out by buying a put option.

Question 36

A ________ option is an option to purchase a specified number of shares on or before some future date at a specified price,whereas a _______ option is an option to sell a specified number of shares on or before some future date at a specified price.______ are bought if the share is expected to rise.

A) put; call; Puts
B) call; put; Puts
C) call; put; Calls
D) put; call; Calls

Question 37

Which of the following statements best reflects the following profit profile of an option contract?

A) The profile depicts the short call position of the option seller.
B) The profile depicts the long call position of the buyer of the option.
C) The profile depicts the short put position of the option seller.
D) The profile depicts the long put position of the buyer of the option.

Question 38

On the expiration date for a put option with strike price of $10.00,premium $1.50 and the current spot price of $14.00,the holder will:

A) buy the shares in the market place.
B) let the option contract lapse.
C) exercise the option.
D) make a profit of $1.50

Question 39

An investor purchases a call option at a premium of $1.25,with an exercise price of $7.50 within three months.The holder of the option will:

A) be in-the-money if the market price of the shares reaches $6.25
B) only exercise the option if the current market price reaches or exceeds $8.75
C) exercise the option at any price above $7.50, if necessary.
D) break even at a market price of $7.50, and will exercise the option.

Question 40

In an options contract,the strike price is also known as the:

A) fixed price.
B) equilibrium price.
C) exercise price.
D) market price.

Question 41

Which of the following best reflects the exposure position of a writer of a put option?

A) A loss is made when the spot price is below the exercise price adjusted by the premium.
B) The extent of the loss potential is limited to a zero spot price less the premium paid.
C) The maximum profit to the writer is limited to the extent of the premium paid.
D) All of the given answers.

Question 42

The main feature of the potential profit and loss profile for a long put party may be best described as:

A) the further the spot price is above the exercise price, the greater the profit.
B) profits are made from exercising an option when the spot price falls below the exercise price adjusted for the premium.
C) a loss is sustained if the spot price is less than the exercise price.
D) all of the given answers.

Question 43

Buyers of put options expect the value of the underlying asset to _______,and the sellers of call options expect the value of the underlying asset to ________.

A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease

Question 44

A hedge fund has written a call option on shares of a company with an exercise price of $17.45,and simultaneously also buys a call option on the same share with an exercise price of $16.95.The hedge fund is considered to have written a/an:

A) arbitrage option.
B) naked call/put contract.
C) covered call option.
D) margin call option.

Question 45

A covered call position is:

A) the purchase of a share at the same time as selling a put on that share.
B) the simultaneous purchase of a call and the underlying asset.
C) selling a share short at the same time as selling a call on that share.
D) the purchase of a share at the same time as selling a call on that share.

Question 46

When we contrast futures with options contracts,we can say that:

A) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract the buyer and writer have symmetric rights.
B) in a futures contract the buyer and seller have symmetric rights, whereas in an options contract the buyer and writer have asymmetric rights.
C) for both futures contracts and options contracts the buyer and writer have symmetric rights.
D) for both futures contracts and options contracts the buyer and writer have asymmetric rights.

Question 47

In the Australian options markets a LEPO is:

A) low-expiration price option.
B) low-exercise price option.
C) large exercise price option.
D) long-exercise price option.

Question 48

The loss for a writer of a naked call option on a share is potentially _____ and so currently short-selling is banned in Australia.

A) limited
B) unlimited
C) larger the more the share price falls
D) equal to the call premium

Question 49

Calculate the value of a short call if the strike price is $10.00,the premium is $1.50 and the spot price is $8.00,given V = P - max(S-X,0).

A) -$1.50
B) -$0.50
C) $0.50
D) $1.50

Question 50

In options markets,where a call writer holds the underlying assets,this is called a:

A) long put.
B) short put.
C) covered call.
D) covered spread.

Question 51

An investor holds long call options that may be exercised at any time over the next month.The spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the premium paid was $2.35.What is the value of the option to the holder?

A) -$2.35
B) zero
C) $10.40
D) $15.10

Question 52

Calculate the value of a short put if the exercise price is $10.00,the premium is $1.50 and the spot price is $8.00,given V = P - max(X-S,0).

A) -$1.50
B) -$0.50
C) $0.00
D) $0.50

Question 53

Which of the following statements best reflects the following profit profile of an option contract?

A) The profile depicts the short call position of the option seller.
B) The profile depicts the long call position of the buyer of the option.
C) The profile depicts the short put position of the option seller.
D) The profile depicts the long put position of the buyer of the option.

Question 54

Which of the following is NOT a condition applied to call options listed on the Australian Securities Exchange (ASX Trade)on leading ordinary shares?

A) Typically, there are numerous option contracts offered on a particular share over a range of expiration dates.
B) A long call option buyer must meet the deposit and margin calls of the clearing house whereas the writer does not have to.
C) Typically, three or more options are traded with the same expiration date, but with different strike prices.
D) The Options Clearing House handles the assignment of option contract exercise notices submitted by buyers.

Question 55

The most important benefit of an options contract strategy for a hedger is:

A) the income paid to the writer of the option.
B) risk of loss from unfavourable price movements is limited.
C) the premium is kept by the seller of the option.
D) the option can be exercised at any time.

Question 56

In the Australian options markets the warrant that has an upper limit applied to the upside profit available for the holder is a/an:

A) capped warrant.
B) LEPO.
C) instalment warrant.
D) endowment warrant.

Question 57

The option that is a highly leveraged option on individual stocks,with an exercise price of between one and ten cents,traded on the ASX Trade,with a European-type expiry,is a:

A) strip.
B) warrant.
C) barrier option.
D) LEPO.

Question 58

Calculate the value of a long put if the exercise price is $10.00,the premium is $1.50 and the spot price is $8.00,given V=max(X-S,0)- P.

A) -$3.00
B) -$1.50
C) $0.00
D) $0.50

Question 59

The highly geared option contract on individual stocks on the ASX with an exercise price of between one and ten cents is a/an:

A) capped warrant.
B) LEPO.
C) instalment warrant.
D) endowment warrant.

Question 60

Calculate the value of a long call if the exercise price is $10.00,the premium is $1.50 and the spot price is $8.00,given V = max(S-X,0)- P.

A) -$3.00
B) -$1.50
C) $0.00
D) $0.50

Question 61

In the options markets a put option is said to be out-of-the money if the:

A) exercise price is less than the share price.
B) exercise price is greater than the share price.
C) exercise price is equal to the share price.
D) price of the put is higher than the price of the call.

Question 62

What security gives the holder an option to purchase a specified number of shares at a predetermined price within a certain period of time?

A) A convertible bond
B) A put option
C) An equity warrant
D) A repurchase agreement

Question 63

In the options markets a put option is said to be in-the-money if the:

A) exercise price is less than the share price.
B) exercise price is greater than the share price.
C) exercise price is equal to the share price.
D) price of the put is higher than the price of the call.

Question 64

The strategy whereby a company buys an interest rate option that puts a maximum level on the interest rate for its borrowing is a:

A) limit option.
B) cap option.
C) boundary option.
D) ceiling option.

Question 65

In the Australian options markets,a warrant that is made up of a selection of shares from the mining industry is an example of a/an:

A) basket warrant.
B) index warrant.
C) capped warrant.
D) instalment warrant.

Question 66

A lender,concerned that its cost of funds might rise during the term of a loan it has made,can hedge this rise without forgoing the chance to profit by a decline in the cost of funds.This is done by:

A) selling futures contracts on Treasury bills.
B) buying futures contracts on Treasury bills.
C) buying call options on Treasury bills.
D) buying put options on Treasury bills.

Question 67

Which of the following variables affect the value of options?
I)Difficulty of interest rates
Ii)Time to maturity of the option
Iii)Share price volatility
Iv)Dividend yield on the underlying share

A) i and iv only
B) ii and iii only
C) i, ii and iv only
D) i, ii, iii and iv

Question 68

Suppose that Maxima shares are selling for $10 per share and you own a call option to buy Maxima shares at $7.50.The intrinsic value of your option is:

A) $10.00
B) $7.50
C) $2.50
D) not determinable without further information.

Question 69

In the options markets for a covered option,the:

A) option premium never alters from the intrinsic value.
B) strike price is always above the exercise price.
C) seller owns the underlying asset.
D) seller does not have an interest in the underlying asset.

Question 70

The intrinsic value of an option is:

A) the same as the option premium.
B) the amount the option is actually worth if it is immediately exercised.
C) the amount the option is likely to be worth on its expiration date.
D) impossible to determine given the lack of information on the future prices of the underlying asset.

Question 71

In the options markets a put option is regarded as being in-the-money if:

A) it is written on a Treasury bond or another money market instrument.
B) it has increased in value since it was first written.
C) the price of the underlying asset is currently less than the strike price.
D) the price of the underlying asset is currently less than the strike price plus the option premium.

Question 72

In relation to options when interest rates decrease,the:

A) price of call options generally increases.
B) price of the underlying share usually decreases.
C) price of put options generally increases.
D) volatility of the underlying asset falls.

Question 73

In option language,a 'cap' is a:

A) boundary option.
B) ceiling option.
C) floor option.
D) perimeter option.

Question 74

When interest rates are forecasted to rise,a company approaches its bank before the next roll-over date of its current debt facilities,and buys an interest rate cap option.However,the company is concerned at the cost of the cap premium and decides to simultaneously sell an interest rate floor option of the same maturity.Which of the following statements is correct?

A) The transactions may be described as an exchange traded options contract.
B) The company has obtained cover with a collar option strategy.
C) This option strategy will achieve a zero cost outcome for the company.
D) All of the given answers are correct.

Question 75

A call option is regarded as being in-the-money if:

A) it is written on a Treasury bond or another money market instrument.
B) it has increased in value since it was first written.
C) the price of the underlying asset is currently greater than the strike price.
D) the price of the underlying asset is currently greater than the strike price plus the option premium.

Question 76

All of the following factors affect the price of a share option except the:

A) riskiness of the share.
B) risk-free rate.
C) time to expiration.
D) expected rate of return on the share.

Question 77

Which of the following factors is NOT generally regarded as a major determinant of the price of an option?

A) The spot price of the underlying asset, relative to the option exercise price
B) The elapsed time since the start of the option
C) The volatility of the spot price of the underlying asset
D) The level of interest rates

Question 78

Which of the following factors would tend to increase the size of the premium on an options contract?

A) The current short-term interest rates are high
B) The option is near its expiration date
C) The price volatility of the underlying asset is low
D) The option is far off its expiration date

Question 79

In relation to options when interest rates increase,the:

A) price of call options generally falls.
B) price of the underlying share usually increases.
C) price of put options generally falls.
D) volatility of the underlying asset falls.

Question 80

The value of a put option rises when the underlying asset:

A) has reduced volatility.
B) has relatively short maturity.
C) experiences price increases.
D) experiences price falls.