FIN 652 - Ch 10 Quiz

A warrant is an option that is issued by _______. A corporation or financial institution An options exchange A brokerage firm A clearinghouse

A corporation or financial institution

Which of the following describes LEAPS? Options which are partly American and partly European Options where the strike price changes through time Exchange-traded stock options with longer lives than regular exchange-traded stock options Options on the average stock price during a period of time

Exchange-traded stock options with longer lives than regular exchange-traded stock options

European option can by exercised at any time up to the expiration date. True False

False

The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader's net profit or loss? Loss of $1,500 Loss of $500 Gain of $1,500 Loss of $1,000

Gain of $1,500 The option payoff is 70−69 = $1. The amount received for the option is $4. The gain is $3 per option. In total 5×100 = 500 options are sold. The total gain is therefore $3 × 500 = $1,500.

The value of an option at expiration is its _______. intrinsic value time value strike price premium

Intrinsic Value

An investor has exchange-traded put options to sell 100 shares for $20. There is 25% stock dividend. Which of the following is the position of the investor after the stock dividend? Put options to sell 100 shares for $20 Put options to sell 75 shares for $25 Put options to sell 125 shares for $15 Put options to sell 125 shares for $16

Put options to sell 125 shares for $16 The stock dividend is equivalent to a 5 for 4 stock split. The number of shares goes up by 25% and the strike price is reduced to 4/5 of its previous value.

An investor has exchange-traded put options to sell 100 shares for $20. There is a 2 for 1 stock split. Which of the following is the position of the investor after the stock split? Put options to sell 100 shares for $20 Put options to sell 100 shares for $10 Put options to sell 200 shares for $10 Put options to sell 200 shares for $20

Put options to sell 200 shares for $10 When there is a stock split the number of shares increases and the strike price decreases. In this case, because it is a 2 for 1 stock split, the number of shares doubles and the strike price halves.

The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10. When does the trader make a profit? When the stock price is below $60 When the stock price is below $64 When the stock price is below $54 When the stock price is below $50

When the stock price is below $50 The payoff must be more than the $10 paid for the option. The stock price must therefore be below $50.

A put option in which the stock price is $60 and the exercise price is $65 is said to be in-the-money out-of-the-money at-the-money need more information to decide

in-the-money

All of the following are forms of options EXCEPT convertible bonds warrants mutual funds executive stock options

mutual funds