Final Exam
TB MC QU. (Static) A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ___ and a time value of ___ A. $3.50; $0 B. $5; $3.50 C. $3.50; $E5 D. $0; $3.50
$0; $3.50
You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ___. A. $120 B. $1,000 C. $11,000 D. $12,000
$11,000
Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be ___. A. $150 B. $400 C. $600 D. $1,850
$150
The May 17th, 2020, price quotation for a boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ___. A.$1,980 B. $4,900 C. $5,000 D. $2,080
$2,080
You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is ___. A. $125 B. $450 C. $575 D. Unlimited
$575
TB MC Qu. 16-10 (Static) A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ___ and a time value of ___ A. $5; $1.50 B. $1.50; $5 C. $0; $6.50 D. $6.50; $0
$5; $1.50
TB MC Qu. 17-59 (Static) At contract maturity the basis should equal ___. A. 1 B. 0 C. The risk-free interest rate D. -1
0
TB MC Qu. 17-54 (Static) A speculator will often prefer to buy a futures contract rather than the underlying asset because: 1. Gains in futures contracts can be larger due to leverage 2. Transactions costs in futures are typically lower than those in spot markets 3. Futures markets are often more liquid than the markets of the underlying commodities
1, 2, and 3
The value of a listed call option on a stocker is lower when: 1. The exercise price is higher 2. The contract approaches maturity 3. The stock decreases in value 4. A stock split occurs
1, 2, and 3 only
You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? 1. One way to hedge your position would be to buy puts. 2. One way to hedge your position would be to write calls. 3. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.
1, 2, and 3 only
Each listed stock option contract gives the holder the right to buy or sell ___ shares of stock A. 1 B. 10 C. 100 D. 1,000
100
The value of a listed put option on a stock is lower when: 1. The exercise price is higher 2. The contract approaches maturity 3. The stock decreases in value 4. A stock split occurs
2 only
____ option can only be exercised on the expiration date A.A Mexican B. An Asian C. An American D. A European
A European
TB MC Qu. 16-58 (Static) Which one of the following will increase the value of a put option? A. A decrease in the exercise price B. A decrease in time to expiration of the put C. An increase in the volatility of the underlying stock D. An increase in stock price
An increase in the volatility of the underlying stock
Tb MC Qu. 16-41 (Static) The delta of a put option on a stock is always ____. A. Between 0 and -1 B. Between -1 and 1 C. Positive but less than 1 D. Greater than 1
Between 0 and -1
TB MC Qu. 16-24 (Static) Hedge ratios for long calls are always ___. A. Between -1 and 0 B. Between 0 and 1 C. 1 D. Greater than 1
Between 0 and 1
A ___ is an option valuation model based on the assumption,potion that stock prices can move to only two values over any short time period A. Nominal model B. Binomial model C. Time model C. Black-Sholes model
Binomial model
TB MC Qu. 17-22 (Static) Margin must be posted by ___. A. Buyers of futures contracts only B. Sellers of futures contracts only C. Both buyers and sellers of futures contracts D. Speculators only
Both buyers and sellers of futures contracts
TB MC Qu. 17-38 (Static) An investor would want to ___ to exploit an expected fall in interest rates A. Sell S&P 500 Index futures B. Sell Treasury-bond futures C. Buy Treasury-bond futures D. Buy wheat futures
Buy Treasury-bond futures
The maximum loss a buyer or stock call option can suffer is the ___. A. Call premium B. Stock price C. Stock price minutes the value of the call D. Strike price minus the stock price
Call premium
TB MC Qu. 17-24 (Static) Margin requirements for futures contracts can be met by___. A. Cash only B. Cash or highly marketable securities such as Treasury bills C. Cash or any marketable securities D. Cash or warehouse receipts for an equivalent quantity of the underlying commodity
Cash or highly marketable securities such as Treasury bills
TB MC Qu. 17-05 (Static) The S&P 500 Index futures contract is an example of a(n) ___ delivery contract. The pork bellies contract is an example of a(n) delivery contract A. Cash; cash B. Cash; actual C. Actual; cash D. Actual;actual
Cash; actual
TB MC Qu. 17-79 (Static) The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior? A. Convergence B. Margin C. Basis D. Volatility
Convergence
TB MC Qu. 17-15 (Static) The fact that the exchange is the counter party to every futures contract issued is important because it eliminated ___risk. A. Market B. Credit C. Interest rate D. Basis
Credit
A writer of a call option will want the value of the underlying asset to ___, and a buyer of a put option will want the value of underlying asset to ___. A. Decrease; decrease B. Decrease; increase C. Increase; decrease D. Increase; increase
Decrease; decrease
TB MC Qu. 16-48 (Static) If a stock price increases, the price of a put option on the stock will ___ and the price of a call option on the stock will ___. A. Decrease; decrease B. Decrease; increase C. Increase; decrease D. Increase; increase
Decrease; increase
The hedge ratio is often called the option's ___ A. Delta B. Gamma C. Theta D. Beta
Delta
TB MC Qu. 15-88 (Static) If you anticipate a dramatic a decline in stock prices, which naked strategy will make you the most profit? A. Long call B. Long put C. Short call D. Short put
Long put
TB MC Qu. 17-50 (Static) A short hedge is a simultaneous ___ position in the spot market and a ___ position in the futures market A. Long; long B. Long; short C. Short; long D. Short; short
Long; short
TB MC Qu. 17-25 (Static) An Established value below which a traders margin may not fall is called the ___. A. Daily limit B. Daily margin C. Maintenance margin D. Convergence limit
Maintenance margin
TB MC Qu. 16-43 (Static) The delta of a call option on a stock is always___. A. Negative and less than -1 B. Between -1 and 1 C. Positive D. Positive BUT less than 1
Positive BUT less than 1
TB MC Qu. 16-22 (Static) the delta of an option is ___. A. The change in the dollar value of an option for a dollar change in the price of the underlying asset B. The change in the dollar value of the underlying asset for a dollar change in the call price C. The percentage change in the value of an option for a 1% change in the value of the underlying asset D. The percentage change in the value of the underlying asset for a 1% change in the value of the call
The change in the dollar value of an option for a dollar change in the price of the underlying asset
TB MC Qu. 16-03 (Static) The ___ is the difference between the actual call price and the intrinsic value A. Stated value B. Strike value C. Time value D. Binomial value
Time value
TB MC Qu. 17-02 (Static) A person with a long position in a commodity futures contract wants the price of the commodity to ___. A. Decrease substantially B. Increase substantially C. Remain unchanged D. Increase or decrease substantially
Increase substantially
The initial maturities of most exchange-traded options are generally___. A. Less than 1 year B. Less than 2 years C. Between 1 and 2 years D. Between 1 and 3 years
Less than 1 year
TB MC Qu 16-42 (Static) The price of a stock put option is ___ correlated with the stock price and ___ correlated with the exercise price A. Negatively; negatively B. Negatively; positively C. Positively; negatively D. Positively; positively
Negatively; positively
TB MC Qu. 15-89 (Static) Why is the holder of an option not required to post margin under the Option Clearing Corporation rules? A. Once an option is purchased, no further money is at risk B. The seller pays all costs C. The credit worthiness of the holder covers all potential losses D. The holder must post securities instead of margin
Once an option is purchase, no further money is at risk
TB MC QU. 17-21 (Static) An investor who goes short in a futures contract will ___ any increase in value of the underlying asset and will ___ any decrease in value in the underlying asset A. Pay; pay B. Pay; receive C. Receive; pay D. Receive; receive
Pay; receive
Before expiration the time value of an out-of-the-money stock option is ___ A. Equal to the stock price minutes the exercise price B. Equal to zero C. Negative D. Positive
Positive
A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. Negative; positive B. Positive; positive C. Zero; zero D. Zero; positive
Positive; positive
TB MC Qu. 17-44 (Static) Futures contracts are said to exhibit the property of convergence because ____ A. The profits from losing positions and short positions must ultimately be equal B. The profits from long positions and short positions must ultimately net to zero C. Price discrepancies would open arbitrage opportunities for investors who identify them D. The futures price and spot price of any asset must ultimately net to zero
Price discrepancies would open arbitrage opportunities for investors who identify them
TB MC Qu. 16-57 (Static) If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by A. Purchasing out-of-the-money call options B. Purchasing at-the-money bull spreads C. Purchasing in-the-money call options D. Purchasing at-the-money call options
Purchasing out-of-the-money call options
TB MC Qu. 17-33 (Static) You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called ____. A. A cross-hedge B. A reversing trade C. A speculation D. Marking to market
A reversing trade
TB MC Qu. 17-06 (Static) Which one of the following contracts requires no cash to change hands when initiated? A. Listed put option B. Short futures contract C. Forward contract D. Listed call option
Forward contract
TB MC Qu. 17-09 (Static) Futures contracts have many advantages over forward contracts except that ___. A. Futures positions are easier to trade B. Futures contracts are tailored to the specific needs of the investor C. Futures trading preserves the anonymity of the participants D. Counterparts credit risk is not a concern on futures
Futures contracts are tailored to the specific needs of the investor
All else equal, call option values are ___ if the ___ is lower A. Higher; stock price B. Higher; exercise price C. Lower; dividend payout D. Higher; lower volatility
Higher; exercise price
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. At the money B. In the money C. Out of the money D. Knocked in
In the money
TB MC Qu. 17-86 (Static) The only money exchanged by both the long and short at the creation of a futures contract is called the ___. A. Spot price B. Futures price C. Margin D. Collateral
Margin
TB MC Qu. 17-23 (Static) The daily settlement of obligations on futures positions are called___. A. A margin call B. Marking to market C. A variation margin check D. They initial margin requirement
Marking to market
TB MC Qu. 17-43 (Static) An investor would want to ___ to hedge a long position in Treasury bonds A. Buy interest rate futures B. Buy Treasury bonds in the spot market C. Sell interest rate futures D. Sell S&P 500 futures
Sell interest rate futures
TB MC Qu. 17-58 (Static) If you expect a stock market downturn, one potential defensive strategy would be to ___. A. Buy stock-index futures B. Sell stock-index futures C. Buy stock-index options D. Sell foreign schnauzer futures
Sell stock-index futures
An American put option gives its holder the right to _________. 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 at the expiration date C. Sell the underlying asset at the exercise price on or before the expiration date D. Sell the underlying asset at the exercise price only at the expiration date
Sell the underlying asset at the exercise price on or before the expiration date
A European put option gives its holder the right to ___. A. Buy the underlying asset at the exercise price on or before the expiration date B. Buy the underlying asset the exercise price only at the expiration date C. Sell the underlying asset at the exercise price on or before the expiration date D. Sell the underlying at the exercise price only at the expiration date
Sell the underlying at the exercise price only at the expiration date
TB MC Qu. 17-17 (Static) A wheat farmer should ___ in order to reduce his exposure to risk associated with fluctuations in wheat prices A. Sell wheat futures B. Buy wheat futures C. Buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time D. Sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative
Sell wheat futures
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put
Short call and long put
Which of the following strategies makes a profit if the stock price stays stable? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put
Short call and short put
Tb MC Qu. 17-18 (Static) Which of the following provides the profit to a long position at contract maturity? A. Original futures price- spot price at maturity B. Spot price at maturity- original futures price C. Zero D. Basis
Spot price at maturity- original futures price
TB MC Qu. 16-25 (Static) which of the following is a true statement? A. The actual value of a call option is greater than its intrinsic value prior to expiration B. The intrinsic value of a call option is always greater than its time value prior to expiration C. The intrinsic value of a call option is always positive prior to expiration D. The intrinsic value of a call option is greater than its actual value prior to expiration
The actual value of a call option is greater than its intrinsic value prior to expiration
TB MC Qu. 16-17 (Static) The intrinsic value of a call option is equal to ___. A. The stock price minus the exercise price B. The exercise price minus the stock price C. The stock price minus the exercise price plus any expected dividends D. The exercise price minus the stock price plus any expected dividends
The stock price minus the exercise price
The writer of a put option____ A. Agrees to sell shares at a set price if the option holder desires B. Agrees to buy shares at a set price if the option holder desires C. Has the right to buy shares at a set price D. Has the the right to sell shares at a set price
Agrees to buy shares at a set price if the option holder desires
Tb MC Qu. 16-46 (Static) A one-dollar increase in a stock's price would result in ___ in the call option's value of ___ than one dollar A. A decrease; less B. A decrease; more C. An increase; less D. An increase; more
An increase; more
TB MC Qu. 17-47 (Static) Violation of the spot-futures parity relationship results in ___. A. Fines and other penalties es imposed by the SEC B. Arbitrage opportunities for investors who identify them C. Suspension of delivery privileges D. Suspension of trading
Arbitrage opportunities for investors who identify them
TB MC Qu. 15-87 (Static) at expiration of an option contract, which phrase describes the point at which both calls and put have the same gross profit? A. At the money B In the money C. Out of the money D. Knocked in
At the money
TB MC Qu. 17-62 (Static) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above date, which of the following set of transactions will yield positive risk less arbitrage profits? A. Buy gold in the spot with borrowed money, and sell the futures contract B. Buy the futures contract, and sell the gold spot and invest the money earned C. Buy gold spot with borrowed money, and buy the futures contract D. Buy the futures contract, and buy the gold spot using borrowed money
Buy gold in the spot with borrowed money, and sell the futures contract
An American call option gives the buyer the right to ___. A. Buy the underlying asset at the exercise price on or before the expiration date B. Buy the underlying asset the exercise price only at the expiration date C. Sell the underlying asset at the exercise price on or before the expiration date D. Sell the underlying asset at the exercise price only at the expiration date
Buy the underlying asset at the exercise price on or before the expiration date
A European call option gives the buyer the right to ___. 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 at the expiration date C. Sell the underlying asset at the exercise price on or before the expiration date D. Sell the underlying asset at the exercise price only at the expiration date
Buy the underlying asset at the exercise price only at the expiration date
TB MC Qu. 16-61 (Static) According to the put-call parity theorem, the payoffs associated with the ownership of a call option can be replicated by ___. A.shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price B. Buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock. With the same exercise price C. Buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price. D. Shorting the underlying stock, lending the present value of the exercise price, and buying a put on the same underlying stock with the same exercise price.
Buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock. With the same exercise price
TB MC Qu. 17-16 (Static) In the futures market the short position's loss is ___ the long position's gain A. Greater than B. Less than C. Equal to D. Sometimes less than and sometimes greater than
Equal to
A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. A. At the money B. In the money C. Out of the money D. Knocked out
In the money
TB MC Qu. 16-02 (Static) The ___ of the option is the stock price minus the exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option A. Intrinsic value B. Time value C. Stated value D. Discounted value
Intrinsic value
TB MC Qu. 17-28 (Static) A futures contract ___. A. Is a contract to be signed in the future by the buyer and the seller of a commodity B. Is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. Is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. Gives the buyer the right, but not the obligation, to buy an asset some time in the future
Is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract
TB MC Qu. 16-76 (Static) The Intrinsic value of an out-of-the-money call option ___ A. Is negative B. Is positive C. Is zero D. Cannot be determined
Is zero
At contract maturity the value of a put option is ____, where X equals the option's strike price and S_T is the stick price at contract expiration. A. Max (0, ST-X) B. Min (0, ST-X) C. Max (0, X-ST) D. Min (0, X-ST)
Max (0, X-ST)
You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. A. Max (P0, X - ST - P0) B. Min (-P0, X - ST - P0) C. Min (P0, ST-X+P0) D. Max (0, ST - X - P0)
Min (P0, ST-X+P0)
All else the same, an American-style option will be ______ valuable than a ______ style option. A. More; European B. Less; European C. More; Canadian D. Less; Canadian
More; European
Tb MC Qu. 17-13 (Static) An investor who goes long in a futures will ____ any increase in value of the underlying asset and will ___ any decrease in the value in the underlying asset A. Pay; pay B. Pay; receive C. Receive; pay D. Receive; receive
Receive; pay
The potential loss for a writer of a naked call option on a stock is ___. A. Equal to the call premium B. Larger the lower the stock price C. Limited D. Unlimited
Unlimited
Longer-term American-style options with maturities of up to 3 years are called __________. A. Warrants B. LEAPS C. GICs D.CATs
LEAPS
TB MC Qu. 17-03 (Static) If an asset price declines, the investor with a ___ is exposed to the largest potential loss A. Long cal option B. Long put option C. Long futures contract D. Short futures contract
Long futures contract
TB MC Qu. 17-1 (Static) The open interest on silver futures at a particular time is the number of ___. A. All outstanding silver futures contracts B. Long and short silver futures positions counted separately on a particular trading day C. Silver futures contracts traded during the day D. Silver future contracts traded the previous day
All outstanding silver futures contracts
TB MC Qu. 17-76 (Static) The use of leverage is practiced in the futures markets due to the existence of ___. A. Banks B. Brokers C. Clearinghouses D. Margin
Margin
___ is the riskiest transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is complete. A. Writing an uncovered call option B. Writing an uncovered put option C. Buying a call option D. Buying a put option
Writing an uncovered put option
Buyers of listed options ___ required to post margins, and writers of naked listed options___ required to post margins. A. Are; are not B. Are; are C. Are not; are D. Are not; are not
Are not; are
TB MC Qu. 17-39 (Static) Forward contracts ___ traded on an organized exchange, and futures contracts ___ traded on an organized exchange A. Are; are B. Are; are not C. Are not; are D. Are not; are not
Are not; are
TB MC Qu. 17-14 (Static) The advantage that standardization of futures contracts brings is the ___ is improved because ___. A. Liquidity; all traders must trade a small set of identical contracts B. Credit risk; all traders understand the risk of the contracts C. Pricing; convergence is more likely to take place with fewer contracts D. Trading cost; trading volume is reduced
Liquidity; all traders must trade a small set of identical contracts
TB MC Qu. 17-42 (Static) Investors who take short positions in futures contract agree to ___ delivery of the commodity on the delivery date, and those who take long positions agree to ___ delivery of the commodity A. Make; make B. Make; take C. Take; make D. Take; take
Make; take
Which of the following expressions represents the value of a call option to its holder on the expiration date? A. ST - X if ST > X, 0 if ST ≤ X B. -(ST-X) if ST > X, 0 if ST ≤ X C. O if ST ≥ X, X - ST if ST < X D. O if ST≥X, -(X-ST) if ST < X
ST-X if ST>X, 0 if ST ≤ X
TB MC Qu. 17-36 (Static) A hog farmer decides to sell hog futures. This is an example of ___ to limit risk A. Cross-hedging B. Short hedging C. Spreading D. Speculating
Short hedging
If you combine a long stock position with selling an at-the-money call option the resulting net payoff profile will resemble the payoff profile of a ___. A. Long call B. Short call C. Short put D. Long put
Short put
TB MC Qu. 16-71 (Static) What combination of variables is likely to lead to the lowest time value A. Short time to expiration and low volatility B. Long time to expiration and high volatility C. Short time to expiration and high volatility D. Long time to expiration and low volatility
Short time to expiration and low volatility
TB MC Qu. 17-41 (Static) A long Hedge is a simultaneous ___ position in the spot market and a ___ position in the futures market A. Long; long B. Long; short C. Short; long D. Short; short
Short; long
TB MC Qu. 17-27 (Static) At maturity of a futures contract, the spot price must be approximately the same because of ____. A. Marking to market B. The convergence property C. The open interest D. The triple witching hour
The convergence property
TB MC Qu. 17-45 (Static) In the context of a futures contract, the basis is defined as ____. A. The futures price minus the spot price B. The spot price minutes the futures price C. The futures price minus the initial margin D. The profit on the futures contract
The futures price minus the spot price
You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, S_T is the stock price at contract expiration, and C0 is the original purchase price of the option. A. Max (-C0, ST-X-C0) B. Min (-C0, ST-X-C0) C. Max (C0, ST-X-C0) D. Max (0,ST-X-C0)
Max (-C0, ST-X-C0)
At contract maturity the value of a call option is ____, where X equals the option's strike price and S_T is the stock price at contract expiration. A. Max (0, ST-X) B. Min (0, ST-X) C. Max (0, X-ST) D. Min (0, X-ST)
Max (0, ST-X)
TB MC Qu. 17-70 (Static) If the risk-free rate is greater than the dividend yield, then we know that ___. A. The futures price will be higher as contract maturity increases B. F0 < S0 C. FT > ST D. Arbitrage profits are possible
The futures price will be higher as contract maturity increases
TB MC Qu. 17-26 (Static) Which one of the following is a true statement? A. A margin deposit can be met only by cash B. All futures contracts require the same margin deposit C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call
The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call
TB MC Qu. 16-04 (Static) A call option with several months until Expiration has a strike price of $55 when the stock price is $50. The option has ___ intrinsic value and ___ time value A. Negative; positive B. Positive; negative C. Zero; zero D. Zero; positive
Zero; positive