Investments Final (Chp. 17-19)
If an investor is bearish, he or she should not buy a stock index call option.
True
The primary advantage offered investors (speculators) by commodity futures is the largest amount of leverage.
True
The time premium paid for an option tends to reduce the option's potential leverage.
True
A farmer hedges by simultaneously buying and selling futures contracts.
False
A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.
False
A writer of a naked call option will lose money if the price of the stock declines.
False
According to the Black/Scholes option valuation model, the value of a call option rises as it approaches expiration.
False
An investor buy a straddle in anticipation of stable stock prices.
False
An investor cannot buy and sell two different call options with the same expiration dates.
False
An option's intrinsic value exceeds the option's price.
False
As the price of a stock rises, the time premium paid for an option to buy stock increases.
False
Because of the small cash outlay to buy an option, these securities are considered to be conservative investments.
False
Buying a stock index option reduces systematic risk.
False
Calls are options to sell stock at a specified price within a specified time period.
False
Calls tend to sell for a time premium that exceeds the stock's price.
False
If an individual sells a stock short, that investor is protected from a large increase in the price of the stock by selling a call option.
False
If an investor enters into a contract to sell corn, that position is closed by buying the corn.
False
If an investor enters into a contract to sell corn, that position is closed by delivering the contract.
False
If the hedge is 0.7, the number of call options necessary to offset a long position in a stock is 7.0.
False
If the investor buys a stock index put, the individual will profit if the market rises.
False
If the price of an option to buy stock were to sell for less than its strike price, an opportunity for arbitrage exists.
False
Investors can only buy futures, since these contracts cannot be sold.
False
Margin is required only of those investors who take long positions in futures contracts.
False
Put-call parity suggests that the sum of the prices of a stock, a call and a put on that stock, and a debt instrument maturing at the expiration of the options must equal zero.
False
Selling a call and purchasing a treasury bill produces the same returns as buying a stock.
False
Selling a commodity contract is a long position.
False
Selling a covered call option is comparable to selling a stock short.
False
Since the SEC does not have jurisdiction over commodity trading, these markets are unregulated.
False
Since there are many grades of corn, the seller of a contract may deliver any type of corn.
False
The Black/Scholes option valuation model, the option's strike price by the probability that the option will be exercised.
False
The amount of margin required to enter into a futures contract is at least 50% of the value of the contract.
False
The intrinsic value of a call option is the strike price minus the stock's price.
False
The intrinsic value of a put establishes the put's maximum price.
False
The intrinsic value of a put is the price of the stock minus the put's strike price.
False
The maximum potential profit on a covered call is the time premium paid for the stock.
False
The most the investor who sells a naked stock index option can lose is the cost of the option.
False
The price of an option is generally less than the option's intrinsic value.
False
The profits on options are exempt from federal income taxation.
False
The protective call strategy is an illustration of a short position.
False
The strike price of an option is fixed.
False
There is no limit to the potential loss from buying a call option.
False
To construct a bear spread, the investor buys a call option and shorts the stock.
False
When a call option is exercised, new stock is issued.
False
When an investor enters (also referred to as "purchases") commodity contracts, the individual takes physical delivery of the goods.
False
When an investor sells a contract and subsequently offsets (closes) the position, the individual experiences neither losses nor profits.
False
While individuals can write call options, they can only buy put options.
False
Writing covered call options is more risky than writing naked call options.
False
A covered call is constructed by buying the stock and selling the call.
True
A position in a futures contract is canceled (offset) by entering into the opposite position.
True
A put is an option to sell stock at a specified price within a specified time period.
True
A warrant is an option issued by a corporation to buy its stock at a specified price within a specified time period.
True
According to put-call parity, if a stock is overvalued, the investor should sell the stock short, sell the put, buy the call, and buy the bond.
True
According to the Black/Scholes option valuation model, the value of a call option rises as its interest rates increase.
True
An investor may reduce risk by simultaneously purchasing a stock and a put option.
True
Arbitrage determines the maximum price of an option.
True
Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.
True
Because of arbitrage, an option should not sell for less than its intrinsic value.
True
Bull and Bear spreads require taking a long position in an option and a short position in another option with different strike price.
True
Buying a call and a treasury bill produces similar results as buying a stock and a put.
True
Buying a futures contract is a long position.
True
Call options are usually for less than a year.
True
Call options, unlike warrants, may be written by individuals.
True
Futures contracts are bought and sold in organized markets such as the Chicago Board of Trade
True
Holders of calls do not receive the cash dividends paid to the company's stockholders.
True
If an investor anticipated that interest rates would rise, that individual should sell an option to buy Treasury bonds.
True
If investors believe that a stock's prices will fluctuate but they are not certain as to the direction, these investors may buy a straddle.
True
If the price of a stock rises, the writer of a put option profits.
True
In addition to put and call options on individual stocks, there are also options on the market as a whole.
True
In-the-money stock index options are not exercised.
True
Investing in futures contracts is considered to be among the riskiest of all investment alternatives.
True
Most investors rarely have an opportunity to establish an arbitrage position.
True
Put-call parity explains why a change in interest rates by the Federal Reserve must affect stock and option prices.
True
Since options offer potential leverage, they tend to sell for a time premium.
True
Stock index options permit investors to establish a position in the market without having to select individual stocks.
True
The "collar strategy" is used to lock-in profits from an increase in the price of a stock.
True
The CBOE is a secondary market for put and call options.
True
The Futures Trading Commission enforces the federal laws regulating commodity transactions.
True
The buyer of a call option wants the price of the stock to rise.
True
The daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.
True
The hedge indicates the number of call options that is necessary to offset price movements in the underlying stock.
True
The hedge ratio is one piece of information given by the Black/Scholes option valuation model.
True
The intrinsic value of an option is to buy stock (ie. call option) is the difference between the price of the stock and the per share exercise price of the option.
True
The investor must maintain a minimum amount of equity (ie. maintenance margin) to maintain a futures position.
True
The most the individual who buys a put option can lose is the cost of the option.
True
The price of a call option is often more volatile than the price of the underlying stock.
True
The value of a put is inversely related to the value of the underlying stock.
True
The writer of a call option does not receive any dividends paid by the firm.
True
The writer of a covered call cannot lose money if the price of the stock rises.
True
Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.
True
