FIN 300 Conceptual Question Review (3)
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 __________. $3.50; $0 $5; $3.50 $3.50; $5 $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 __________. $120 $1,000 $11,000 $12,000
$11,000 Profit = ($120 − $10) × 100 = $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 __________. $150 $400 $600 $1,850
$150 Profit = ($79.00 − $75.00 − $8.50 + $6.00) × 100 = $150
The May 17, 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 __________. $1,980 $4,900 $5,000 $2,080
$2,080 20.80 aka the call option's price quote * 100
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 __________. $125 $450 $575 unlimited
$575 Highest loss comes when ST = $50 (stays at $50) Loss = ($1.25 + $4.50) × 100 = $575
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 __________. $5; $1.50 $1.50; $5 $0; $6.50 $6.50; $0
$5; $1.50
At contract maturity the basis should equal ___________. Multiple Choice 1 0 the risk-free interest rate −1
0
The value of a listed call option on a stock is lower when: The exercise price is higher. The contract approaches maturity. The stock decreases in value. A stock split occurs. 2, 3, and 4 only 1, 3, and 4 only 1, 2, and 3 only 1, 2, 3, and 4
1, 2, and 3 only
The value of a listed put option on a stock is lower when: The exercise price is higher. The contract approaches maturity. The stock decreases in value. A stock split occurs. 2 only 2 and 4 only 1, 2, and 3 only 1, 2, 3, and 4
2 only
__________ option can only be exercised on the expiration date. A Mexican An Asian An American A European
A European
At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit? At the money In the money Out of the money Knocked in
At the money
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 data, which of the following set of transactions will yield positive riskless arbitrage profits? Buy gold in the spot with borrowed money, and sell the futures contract. Buy the futures contract, and sell the gold spot and invest the money earned. Buy gold spot with borrowed money, and buy the futures contract. 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.
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? Multiple Choice Convergence Margin Basis Volatility
Convergence
Which one of the following contracts requires no cash to change hands when initiated? Listed put option Short futures contract Forward contract Listed call option
Forward contract
Longer-term American-style options with maturities of up to 3 years are called __________. warrants LEAPS GICs CATs
LEAPS
If you anticipate a dramatic a decline in stock prices, which naked strategy will make you the most profit? Long call Long put Short call Short put
Long put
Why is the holder of an option not required to post margin under the Option Clearing Corporation rules? Once an option is purchased, no further money is at risk. The seller pays all costs. The credit worthiness of the holder covers all potential losses. The holder must post securities instead of margin.
Once an option is purchased, no further money is at risk.
Which of the following expressions represents the value of a call option to its holder on the expiration date? ST − X if ST > X, 0 if ST ≤ X − (ST − X) if ST > X, 0 if ST ≤ X 0 if ST ≥ X, X − ST if ST < X 0 if ST ≥ X, − (X − ST) if ST < X
ST − X if ST > X, 0 if ST ≤ X
Which of the following provides the profit to a long position at contract maturity? Original futures price − spot price at maturity Spot price at maturity − original futures price Zero Basis
Spot price at maturity − original futures price
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 __________. Multiple Choice a cross-hedge a reversing trade a speculation marking to market
a reversing trade
The writer of a put option __________. agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires has the right to buy shares at a set price has the right to sell shares at a set price
agrees to buy shares at a set price if the option holder desires
The open interest on silver futures at a particular time is the number of __________. all outstanding silver futures contracts long and short silver futures positions counted separately on a particular trading day silver futures contracts traded during the day silver futures contracts traded the previous day
all outstanding silver futures contracts
Which one of the following will increase the value of a put option? a decrease in the exercise price a decrease in time to expiration of the put an increase in the volatility of the underlying stock an increase in stock price
an increase in the volatility of the underlying stock
Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. are; are not are; are are not; are are not; are not
are not; are
An investor would want to __________ to exploit an expected fall in interest rates. Multiple Choice sell S&P 500 Index futures sell Treasury-bond futures buy Treasury-bond futures buy wheat futures
buy Treasury-bond futures
An American call option gives the buyer the right to __________. buy the underlying asset at the exercise price on or before the expiration date buy 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 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
The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates __________ risk. Multiple Choice market credit interest rate 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 the underlying asset to __________. decrease; decrease decrease; increase increase; decrease increase; increase
decrease; decrease (decrease so the buyer of the c option won't exercise, decrease so that buyer of the p option can sell the stock for more)
The hedge ratio is often called the option's __________. Multiple Choice delta gamma theta beta
delta
All else equal, call option values are __________ if the __________ is lower. Multiple Choice higher; stock price higher; exercise price lower; dividend payout higher; lower volatility
higher; exercise price
A call option on Brocklehurst Corporation has an exercise price of $30. The current stock price of Brocklehurst Corporation is $32. The call option is __________. at the money in the money out of the money knocked in
in the money
A put option on Dr. Pepper Snapple Group, Incorporated, has an exercise price of $45. The current stock price is $41. The put option is __________. at the money in the money out of the money knocked out
in the money
A person with a long position in a commodity futures contract wants the price of the commodity to __________. decrease substantially increase substantially remain unchanged increase or decrease substantially
increase substantially
A futures contract __________. is a contract to be signed in the future by the buyer and the seller of a commodity is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract 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 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
The intrinsic value of an out-of-the-money call option __________. is negative is positive is zero cannot be determined
is zero
The initial maturities of most exchange-traded options are generally __________. less than 1 year less than 2 years between 1 and 2 years between 1 and 3 years
less than 1 year
The advantage that standardization of futures contracts brings is that __________ is improved because __________. liquidity; all traders must trade a small set of identical contracts credit risk; all traders understand the risk of the contracts pricing; convergence is more likely to take place with fewer contracts trading cost; trading volume is reduced
liquidity; all traders must trade a small set of identical contracts
If an asset price declines, the investor with a __________ is exposed to the largest potential loss. long call option long put option long futures contract short futures contract
long futures contract
An established value below which a trader's margin may not fall is called the __________. Multiple Choice daily limit daily margin maintenance margin convergence limit
maintenance margin
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. make; make make; take take; make take; take
make; take
The only money exchanged by both the long and short at the creation of a futures contract is called the __________. Multiple Choice spot price futures price margin collateral
margin
The use of leverage is practiced in the futures markets due to the existence of __________. Multiple Choice banks brokers clearinghouses margin
margin
The daily settlement of obligations on futures positions is called __________. Multiple Choice a margin call marking to market a variation margin check the initial margin requirement
marking to market
At contract maturity the value of a call option is __________, where X equals the option's strike price and ST is the stock price at contract expiration. max (0, ST − X) min (0, ST − X) max (0, X − ST) min (0, X − ST)
max (0, ST − X)
At contract maturity the value of a put option is __________, where X equals the option's strike price and ST is the stock price at contract expiration. max (0, ST − X) min (0, ST − X) max (0, X − ST) min (0, X − ST)
max (0, X − ST)
The delta of a call option on a stock is always __________. negative and less than −1 between −1 and 1 positive positive but less than 1
positive but less than 1
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. Multiple Choice negative; positive positive; positive zero; zero zero; positive
positive; positive
If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by __________. purchasing out-of-the-money call options purchasing at-the-money bull spreads purchasing in-the-money call options purchasing at-the-money call options
purchasing out-of-the-money call options
An investor who goes long in a futures contract will __________ any increase in value of the underlying asset and will __________ any decrease in value in the underlying asset. Multiple Choice pay; pay pay; receive receive; pay receive; receive
receive; pay
If you expect a stock market downturn, one potential defensive strategy would be to __________. Multiple Choice buy stock-index futures sell stock-index futures buy stock-index options sell foreign exchange futures
sell stock-index futures
An American put option gives its holder the right to __________. buy the underlying asset at the exercise price on or before the expiration date buy 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 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 __________. buy the underlying asset at the exercise price on or before the expiration date buy 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 sell the underlying asset at the exercise price only at the expiration date
sell the underlying asset at the exercise price only at the expiration date
A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. Multiple Choice sell wheat futures buy wheat futures buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time 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? long call and short put long call and long put short call and short put short call and long put
short call and long put
A hog farmer decides to sell hog futures. This is an example of __________ to limit risk. Multiple Choice cross-hedging short hedging spreading 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 __________. long call short call short put long put
short put
A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. Multiple Choice long; long long; short short; long short; short
short; long
The delta of an option is __________. the change in the dollar value of an option for a dollar change in the price of the underlying asset the change in the dollar value of the underlying asset for a dollar change in the call price the percentage change in the value of an option for a 1% change in the value of the underlying asset 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
At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________. Multiple Choice marking to market the convergence property the open interest the triple witching hour
the convergence property
In the context of a futures contract, the basis is defined as __________. Multiple Choice the futures price minus the spot price the spot price minus the futures price the futures price minus the initial margin the profit on the futures contract
the futures price minus the spot price
If the risk-free rate is greater than the dividend yield, then we know that __________. Multiple Choice the futures price will be higher as contract maturity increases F0 < S0 FT > ST arbitrage profits are possible
the futures price will be higher as contract maturity increases
The intrinsic value of a call option is equal to __________. the stock price minus the exercise price the exercise price minus the stock price the stock price minus the exercise price plus any expected dividends the exercise price minus the stock price plus any expected dividends
the stock price minus the exercise price
The potential loss for a writer of a naked call option on a stock is __________. equal to the call premium larger the lower the stock price limited unlimited
unlimited
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. Multiple Choice negative; positive positive; negative zero; zero zero; positive
zero; positive
__________ 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 completed. Writing an uncovered call option Writing an uncovered put option Buying a call option Buying a put option
Writing an uncovered put option
Violation of the spot-futures parity relationship results in __________. Multiple Choice fines and other penalties imposed by the SEC arbitrage opportunities for investors who identify them suspension of delivery privileges suspension of trading
arbitrage opportunities for investors who identify them
Forward contracts __________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. Multiple Choice are; are are; are not are not; are are not; are not
are; are not
Hedge ratios for long calls are always __________. between −1 and 0 between 0 and 1 1 greater than 1
between 0 and 1
The delta of a put option on a stock is always __________. between 0 and −1 between −1 and 1 positive but less than 1 greater than 1
between 0 and −1
The maximum loss a buyer of a stock call option can suffer is the __________. Multiple Choice call premium stock price stock price minus the value of the call strike price minus the stock price
call premium
Margin must be posted by __________. Multiple Choice buyers of futures contracts only sellers of futures contracts only both buyers and sellers of futures contracts speculators only
both buyers and sellers of futures contracts
A European call option gives the buyer the right to __________. buy the underlying asset at the exercise price on or before the expiration date buy 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 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
The __________ of the option is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. intrinsic value time value stated value discounted value
intrinsic value
A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. Multiple Choice long; long long; short short; long short; short
long; short
The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price. negatively; negatively negatively; positively positively; negatively positively; positively
negatively; positively
Which of the following strategies makes a profit if the stock price stays stable? long call and short put long call and long put short call and short put short call and long put
short call and short put
The __________ is the difference between the actual call price and the intrinsic value. stated value strike value time value binomial value
time value
A one-dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar. a decrease; less a decrease; more an increase; less an increase; more
an increase; less
Futures contracts are said to exhibit the property of convergence because __________. Multiple Choice the profits from long positions and short positions must ultimately be equal the profits from long positions and short positions must ultimately net to zero price discrepancies would open arbitrage opportunities for investors who identify them 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
What combination of variables is likely to lead to the lowest time value? short time to expiration and low volatility long time to expiration and high volatility short time to expiration and high volatility long time to expiration and low volatility
short time to expiration and low volatility
Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. 1 10 100 1,000
100
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. cash; cash cash; actual actual; cash actual; actual
cash; actual
Futures contracts have many advantages over forward contracts except that __________. futures positions are easier to trade futures contracts are tailored to the specific needs of the investor futures trading preserves the anonymity of the participants counterparty credit risk is not a concern on futures
futures contracts are tailored to the specific needs of the investor
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, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. max (−C0, ST − X − C0) min (−C0, ST − X − C0) max (C0, ST − X + C0) max (0, ST − X − C0)
max (−C0, ST − X − C0)
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. max (P0, X − ST − P0) min (−P0, X − ST − P0) min (P0, ST − X + P0) max (0, ST − X − P0)
min (−P0, X − ST − P0)
All else the same, an American-style option will be __________ valuable than a __________-style option. more; European less; European more; Canadian less; Canadian
more; European
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. Transaction 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. Multiple Choice 1 and 2 only 2 and 3 only 1 and 3 only 1, 2, and 3
1, 2, and 3
In the futures market the short position's loss is __________ the long position's gain. greater than less than equal to sometimes less than and sometimes greater than
equal to
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. pay; pay pay; receive receive; pay receive; receive
pay; receive
Before expiration, the time value of an out-of-the-money stock option is __________. equal to the stock price minus the exercise price equal to zero negative positive
positive
An investor would want to __________ to hedge a long position in Treasury bonds. Multiple Choice buy interest rate futures buy Treasury bonds in the spot market sell interest rate futures sell S&P 500 futures
sell interest rate futures
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? One way to hedge your position would be to buy puts. One way to hedge your position would be to write calls. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls. 1 only 2 only 1 and 3 only 1, 2, and 3
1, 2, and 3
Which of the following is a true statement? Multiple Choice The actual value of a call option is greater than its intrinsic value prior to expiration. The intrinsic value of a call option is always greater than its time value prior to expiration. The intrinsic value of a call option is always positive prior to expiration. 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.
Which one of the following is a true statement? Multiple Choice A margin deposit can be met only by cash. All futures contracts require the same margin deposit. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. 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.
A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. Multiple Choice nominal model binomial model time model Black-Scholes model
binomial model
According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by __________. 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 buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price 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 shorting the underlying stock, lending the present value of the exercise price, and buying a put on the same underlying stock and 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 and with the same exercise price Look at the eq: C - P = S0 - Xe^(-rt)
Margin requirements for futures contracts can be met by __________. Multiple Choice cash only cash or highly marketable securities such as Treasury bills cash or any marketable securities cash or warehouse receipts for an equivalent quantity of the underlying commodity
cash or highly marketable securities such as Treasury bills
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 __________. decrease; decrease decrease; increase increase; decrease increase; increase
decrease; increase
