Series 65 Study Questions: CH 4
An investor purchased a Mosaks, Inc., put option with a strike price of $105. If Mosaks' stock price is $115 at expiration, the value of the put option is
$0.
A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next six months. The best strategy to employ would probably be
a long hedge.
You have a client who is bullish on XYZ stock and currently owns 100 shares that last traded at $50. He has a CD coming due in March, six months from now, and is afraid that by the time those funds are available, XYZ will have shot up in price. How can he ensure that he'll be able to pick up the stock at today's price six months from now and not miss out on that market appreciation?
Buy an XYZ March 50 call option.
News reports indicate that the wheat crop scheduled to be harvested in three months will be much larger than normal. To hedge, a wheat farmer would most likely
take a short position in wheat futures.
An investor who is long XYZ stock would consider going long an XYZ call to
protect against an increase in the market price of XYZ stock.
The writer of a call option
receives the premium.
One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing which of these risks? I. Liquidity II. Creditworthiness of the buyer III. Lack of assurance that the delivery price will remain stable IV. Location for the delivery may change
I & II
An option that may be exercised before its expiration date is said to be
American style.
Which of the following statements regarding derivative securities is not true?
An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date).
Kurt expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following would be the best option strategy for Kurt?
Buy a call option.
Which of the following would not be considered derivatives?
ETFs
The term derivative would not apply to which of the following?
REITs
The long party is a futures contract that has entered the contract as
a buyer.
An investor purchases two PMJ Dec 16 calls at $0.85. If the commission charge is $8, the total cost is
$178. $85*2 + 8 = 178
An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be
$20,000.
Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts
are rarely exercised, while forwards generally are.
An investor will likely exercise a put option when the price of the stock is
below the strike price.
For which of the following is there no active secondary market?
Forward contracts
The RIF Corporation would not be able to issue
RIF call options.
A European-style option differs from an American-style option primarily in that it
can only be exercised on its expiration date.
Braydon has received preemptive rights from one of the stocks held in his portfolio. Which of the following is not an alternative regarding these stock rights?
Exercising
Purchasers of options can have a number of different objectives. One of your clients who is a soft-drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option?
It fixes the cost of acquiring additional stock for the portfolio.
A financial instrument whose value depends upon the value of another asset is known as
a derivative.
Which of the following is a multi-option strategy?
Straddle
Which of the following is not considered a derivative?
Unit investment trust
An investor goes long one ABC May 45 Put @ 3 and short one ABC May 50 Put @ 6. This would be known as
a credit spread
An investor would write a call option to
fix the purchase price to add stock to his portfolio.
A commodities speculator purchases a 1,000-bushel wheat futures contract for 75 cents per bushel. At expiration, the settlement price is 85 cents per bushel. This individual
has a $100 gain.
One of your clients purchases a European-style put option on a stock. The premium is $3 and the exercise price is $35. If the price of the underlying asset is $40 on the exercise date, the client has
lost $300.
When contrasting call options, preemptive rights, and warrants, it would be correct to state
only preemptive rights and warrants are issued by the underlying corporation.
When contrasting preemptive rights and warrants, it would be correct to state that, at issuance,
rights have intrinsic and time value while warrants only have time value.
Covered call writing is a strategy where an investor
sells a call on a security he owns to reduce the volatility of the stock's returns and to generate income with the premium.
In contrast with a typical forwards contract, futures contracts have
standardized terms.
A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably
take a long position in corn futures.
Standardized equity options are issued by
the Options Clearing Corporation (OCC).
