Chapter 20: Options Markets - Introduction

48. The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. None of the options

C. the put premium.

49. The lower bound on the market price of a convertible bond is A. its straight bond value. B. its crooked bond value. C. its conversion value. D. its straight bond value and its conversion value. E. None of the options

D. its straight bond value and its conversion value.

46. Binary options A. are based on two possible outcomes—yes or no. B. may make a payoff of a fixed amount if a specified event happens. C. may make a payoff of a fixed amount if a specified event does not happen. D. may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes—yes or no. E. All of the options

E. All of the options

85. Some more "traditional" assets have optionlike features; some of these instruments include A. callable bonds. B. convertible bonds. C. warrants. D. callable bonds and convertible bonds. E. All of the options

E. All of the options

61. A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. None of the options

A. a long put plus a long position in the underlying asset.

13. An American put option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of the options

A. any time on or before the expiration date.

14. An American call option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of the options

A. any time on or before the expiration date.

43. Lookback options have payoffs that A. depend in part on the minimum or maximum price of the underlying asset during the life of the option. B. only depend on the minimum price of the underlying asset during the life of the option. C. only depend on the maximum price of the underlying asset during the life of the option. D. are known in advance.

A. depend in part on the minimum or maximum price of the underlying asset during the life of the option.

4. The price that the writer of a put option receives to sell the option is called the A. premium. B. exercise price. C. execution price. D. acquisition price. E. strike price.

A. premium.

28. A put option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

30. A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

17. To adjust for stock splits A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor. B. the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor. C. the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor. D. the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor.

A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.

81. You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called A. a short straddle. B. a long straddle. C. a horizontal straddle. D. a covered call. E. None of the options

B. a long straddle.

44. Barrier options have payoffs that A. have payoffs that only depend on the minimum price of the underlying asset during the life of the option. B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. C. are known in advance. D. have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

19. All else equal, call option values are higher A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. in the month of May and for low dividend payout policies. E. in the month of May and for high dividend payout policies.

B. for low dividend payout policies.

93. Trading in "exotic options" takes place primarily A. on the New York Stock Exchange. B. in the over-the-counter market. C. on the American Stock Exchange. D. in the primary marketplace. E. None of the options

B. in the over-the-counter market.

99. To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher. A. more; more B. more; less C. less; more D. less; less E. It doesn't matter—they are too risky to be included in a reasonable person's portfolio.

B. more; less

15. A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

B. only on the expiration date.

16. A European put option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

B. only on the expiration date.

11. An American put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. E. buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

B. sell the underlying asset at the striking price on or before the expiration date.

66. Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call.

B. the actual call price minus the intrinsic value of the call.

58. The Option Clearing Corporation is owned by A. the Federal Reserve System. B. the exchanges on which stock options are traded. C. the major U.S. banks. D. the Federal Deposit Insurance Corporation.

B. the exchanges on which stock options are traded.

27. A put option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price.

31. A call option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price.

50. The potential loss for a writer of a naked call option on a stock is A. limited. B. unlimited. C. larger the lower the stock price. D. equal to the call premium. E. None of the options

B. unlimited.

100. What happens to an option if the underlying stock has a 2-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-half of what it was and the number of options held would double. D. The exercise price would double and the number of options held would double. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-half of what it was and the number of options held would double.

101. What happens to an option if the underlying stock has a 3-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-third of what it was and the number of options held would triple. D. The exercise price would triple and the number of options held would triple. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-third of what it was and the number of options held would triple.

64. You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a money spread. D. a short straddle. E. None of the options

C. a money spread.

91. A callable bond should be priced the same as A. a convertible bond. B. a straight bond plus a put option. C. a straight bond plus a call option. D. a straight bond plus warrants. E. a straight bond.

C. a straight bond plus a call option.

65. You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as A. a vertical spread. B. a straddle. C. a time spread. D. a collar.

C. a time spread.

56. Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

18. All else equal, call option values are lower A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. in the month of May and for low dividend payout policies. E. in the month of May and for high dividend payout policies.

C. for high dividend payout policies.

47. The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. None of the options

C. the call premium.

29. A put option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

32. A call option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

69. The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. None of the options

C. the stock price.

92. Asian options differ from American and European options in that A. they are only sold in Asian financial markets. B. they never expire. C. their payoff is based on the average price of the underlying asset. D. they are only sold in Asian financial markets and they never expire. E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset.

C. their payoff is based on the average price of the underlying asset.

87. A collar with a net outlay of approximately zero is an options strategy that A. combines a put and a call to lock in a price range for a security. B. uses the gains from sale of a call to purchase a put. C. uses the gains from sale of a put to purchase a call. D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. E. combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call.

D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put.

57. Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. Cannot tell without further information

D. decrease; decrease

45. Currency-translated options have A. only asset prices denoted in a foreign currency. B. only exercise prices denoted in a foreign currency. C. payoffs that only depend on the maximum price of the underlying asset during the life of the option. D. either asset or exercise prices denoted in a foreign currency.

D. either asset or exercise prices denoted in a foreign currency.

86. Financial engineering A. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. B. primarily takes place for institutional investor. C. primarily takes places for the individual investor. D. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for institutional investor. E. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes places for the individual investor.

D. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for institutional investor.

12. A European put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on the expiration date. E. potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

D. sell the underlying asset at the striking price on the expiration date.

6. The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or exercise price. E. strike price or execution price.

D. strike price or exercise price.

68. All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. None of the options

D. the expected rate of return on the stock.

59. A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

D. the purchase of a share of stock with a simultaneous sale of a call on that stock.

96. Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them. B. a large contingent of investors holds them. C. the writers may choose whether or not to exercise them. D. their payoffs depend on the prices of other assets. E. contingency management is used in adding them to portfolios.

D. their payoffs depend on the prices of other assets.

8. The price that the writer of a put option receives for the underlying asset if the option is exercised is called the A. strike price. B. exercise price. C. execution price. D. strike price or exercise price. E. None of the options

E. None of the options

67. Which of the following factors affect the price of a stock option? A. The risk-free rate B. The riskiness of the stock C. The time to expiration D. The expected rate of return on the stock E. The risk-free rate, riskiness of the stock, and time to expiration

E. The risk-free rate, riskiness of the stock, and time to expiration

9. An American call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

55. Call options on IBM listed stock options are A. issued by IBM Corporation. B. created by investors. C. traded on various exchanges. D. issued by IBM Corporation and traded on various exchanges. E. created by investors and traded on various exchanges.

E. created by investors and traded on various exchanges.

1. The price that the buyer of a call option pays to acquire the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

2. The price that the writer of a call option receives to sell the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

3. The price that the buyer of a put option pays to acquire the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

10. A European call option allows the buyer to A. sell the underlying asset at the exercise price on the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. buy the underlying asset at the exercise price on the expiration date. E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

5. The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or execution price. E. strike price or exercise price.

E. strike price or exercise price.

7. The price that the buyer of a put option receives for the underlying asset if she executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or execution price. E. strike price or exercise price.

E. strike price or exercise price.

70. The value of a stock put option is positively related to A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. the time to expiration and the striking price.

E. the time to expiration and the striking price.