Fin 300, Final Exam MC Review

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 __________.

$2,080

At contract maturity the basis should equal ___________.

0Correct

The maximum loss a buyer of a stock call option can suffer is the __________.

Call premium

Which of the following is a true statement?

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?

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

__________ 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. Multiple Choic

Writing an uncovered put option

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 reversing trade

The writer of a put option __________.

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

Which one of the following will increase the value of a put option?

an increase in the volatility of the underlying stock

A one-dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar.

an increase; less

Violation of the spot-futures parity relationship results in __________.

arbitrage opportunities for investors who identify them

Hedge ratios for long calls are always __________.

between 0 and 1

The delta of a put option on a stock is always __________.

between 0 and −1

An investor would want to __________ to exploit an expected fall in interest rates.

buy Treasury-bond futures

Margin requirements for futures contracts can be met by __________.

cash or highly marketable securities such as Treasury bills

The intrinsic value of an out-of-the-money call option __________.

is zero

The use of leverage is practiced in the futures markets due to the existence of __________.

margin

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

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

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 __________.

$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 __________.

$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

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 __________.

$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

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.

1, 2, and 3

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, 2, and 3

The value of a listed call 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.

1, 2, and 3 only

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

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

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

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period.

Binomial model

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.

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?

Convergence

The hedge ratio is often called the option's __________.

Delta

Which one of the following contracts requires no cash to change hands when initiated?

Forward contract

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 __________.

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 __________.

In the money

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

Longer-term American-style options with maturities of up to 3 years are called __________.

LEAPS

If you anticipate a dramatic a decline in stock prices, which naked strategy will make you the most profit?

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.

Before expiration, the time value of an out-of-the-money stock option is __________.

Positive

Which of the following provides the profit to a long position at contract maturity?

Spot price at maturity − original futures price

The __________ is the difference between the actual call price and the intrinsic value.

Time Value

The potential loss for a writer of a naked call option on a stock is __________.

Unlimited

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

are not; are

Forward contracts __________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

are not; are

An American call option gives the buyer the right to __________.

buy the underlying asset at the exercise price on or before the expiration date

A European call option gives the buyer the right to __________.

buy the underlying asset at the exercise price only at the expiration date

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by __________.

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

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates __________ risk.

creditCorrect

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

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; increase

In the futures market the short position's loss is __________ the long position's gain.

equal to

Futures contracts have many advantages over forward contracts except that __________.

futures contracts are tailored to the specific needs of the investor

All else equal, call option values are __________ if the __________ is lower.

higher; exercise price

A person with a long position in a commodity futures contract wants the price of the commodity to __________.

increase substantially

A futures contract __________.

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 initial maturities of most exchange-traded options are generally __________.

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

If an asset price declines, the investor with a __________ is exposed to the largest potential loss.

long futures contract

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; short

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, X − ST)

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)

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.

min (P0, ST − X + P0)

All else the same, an American-style option will be __________ valuable than a __________-style option.

more; European

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price.

negatively; positively

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; receive

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.

positive; positive

Futures contracts are said to exhibit the property of convergence because __________.

price discrepancies would open arbitrage opportunities for investors who identify them

An investor would want to __________ to hedge a long position in Treasury bonds.

sell interest rate futures

An American put option gives its holder the right to __________.

sell the underlying asset at the exercise price on or before the expiration date

A European put option gives its holder the right to __________.

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.

sell wheat futures

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

short call and long put

Which of the following strategies makes a profit if the stock price stays stable?

short call and short put

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.

zero; positive

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

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; actual

An established value below which a trader's margin may not fall is called the __________.

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; take

The only money exchanged by both the long and short at the creation of a futures contract is called the __________.

margin

The daily settlement of obligations on futures positions is called __________.

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)

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.

receive; pay

If you expect a stock market downturn, one potential defensive strategy would be to __________.

sell stock-index futures

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

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 __________.

short put

What combination of variables is likely to lead to the lowest time value?

short time to expiration and low volatility

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

short; long

At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

the convergence property

In the context of a futures contract, the basis is defined as __________.

the futures price minus the spot price

If the risk-free rate is greater than the dividend yield, then we know that __________.

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

Margin must be posted by __________.

both buyers and sellers of futures contracts

The delta of a call option on a stock is always __________.

positive but less than 1