Fin 300 Final Exam (Set 1)
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 __________. a. $150 b. $400 c. $600 d. $1,850
a. $150 Profit = ($79 - $75 - $8.50 + $6.00) * 100 = $150
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 a. 2 only b. 2 and 4 only c. 1, 2, and 3 only d. 1, 2, 3, and 4
a. 2 only
Which of the following expressions represents the value of a call option to its holder on the expiration date? a. ST - X if ST > X, 0 if ST <= X b. - (ST - X) if ST > X, 0 if ST <= X c. 0 if ST >= X, X - ST if ST < X d. 0 if ST >= X, - ( X - ST) if ST < X
a. ST - X if ST > X, 0 if ST <= X
An American call option gives the buyer the right to _______. a. buy the underlying asset the exercise price on or before the expiration date b. buy the underlying asset at the exercise price only at the expiration date c. sell the underlying asset at the exercise price on or before the expiration date d. sell the underlying asset at the exercise price only at the expiration date
a. buy the underlying asset at the exercise price on or before the expiration date
The maximum loss a buyer of a stock call option can suffer is the ______. a. call premium b. stock price c. stock price minus the value of the call d. strike price minus the stock price
a. call premium
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 ______. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase
a. decrease; decrease
The initial maturities of most exchange-traded options are generally _______. a. less than 1 year b. less than 2 years c. between 1 and 2 years d. between 1 and 3 years
a. less than 1 year
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. a. max (-C0, ST - X - C0) b. min (-CO, ST - X - C0) c. max ( CO, ST - X + C0) d. max ( 0, ST - X - C0)
a. max (-C0, ST - X - C0)
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. a. max (0, ST - X) b. min (0, ST - X) c. max (0, X - ST) d. min (0, X - ST)
a. max (0, ST - X)
All else the same, an American-style option will be _________ valuable than a _________ style option. a. more; European b. less; European c. more; Canadian d. less; Canadian
a. more; European An American-style option can be exercised before or at the time of expiration while a European-style option can be exercised only at the time of expiration. Early exercising is a real option with value
Longer-term American-style options with maturities of up to 3 years are called _______. a. warrants b. LEAPS c. GICs d. CATs
b. LEAPS
________ 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. a. Writing an uncovered call option b. Writing an uncovered put option c. Buying a call option d. Buying a put option
b. Writing an uncovered put option
The writer of a put option ________. a. agrees to sell shares at a set price if the option holder desires b. agrees to buy shares at a set price if the option holder desires c. has the right to buy shares at a set price d. has the right to sell shares at a set price
b. agrees to buy shares at a set price if the option holder desires
A European call option gives the buyer the right to ______. a. buy the underlying asset the exercise price on or before the expiration date b. buy the underlying asset at the exercise price only at the expiration date c. sell the underlying asset at the exercise price on or before the expiration date d. sell the underlying asset at the exercise price only at the expiration date
b. buy the underlying asset at the exercise price only at the expiration date
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 _____. a. at the money b. in the money c. out of the money d. knocked out
b. in the money
A put option on Dr. Pepper Snapple Group, Inc. has an exercise price of $45. The current price of the stock is $41. The put option is ______. a. at the money b. in the money c. out of the money d. knocked out
b. in the money
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 _______. a. $120 b. $1,000 c. $11,000 d. $12,000
c. $11,000 Profit = ($120 - $10) * 100 = $11,000
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 __________. a. $125 b. $450 c. $575 d. unlimited
c. $575 Loss = ($1.25 + $4.50) * 100 = $575
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 a. 2, 3, and 4 only b. 1, 3, and 4 only c. 1, 2, and 3 only d. 1, 2, 3, and 4
c. 1, 2, and 3 only
Each listed stock option contract gives the holder the right to buy or sell ______ shares of stock. a. 1 b. 10 c. 100 d. 1000
c. 100
Buyers of listed options _____ required to post margins, and writers of naked listed options ____ required to post margins. a. are; are not b. are; are c. are not; are d. are not; are not
c. are not; are
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. a. max (0, ST - X) b. min (0, ST - X) c. max (0, X - ST) d. min (0, X - ST)
c. max (0, X - ST)
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. a. max (-P0, ST - X - P0) b. min (-PO, ST - X - P0) c. min ( PO, ST - X + P0) d. max ( 0, ST - X - P0)
c. min (P0, ST - X + P0)
An American put option gives its holder the right to ________. a. buy the underlying asset at the exercise price on or before the expiration date b. buy the underlying asset at the exercise price only at the expiration date c. sell the underlying asset at the exercise price on or before the expiration date d. sell the underlying asset at the exercise price only at the expiration date
c. sell the underlying asset at the exercise price on or before the expiration date
Which of the following strategies makes a profit if the stock price stays stable? a. long call and short put b. long call and long put c. short call and short put d. short call and long put
c. short call and short put
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 ______. a. long call b. short call c. short put d. long put
c. short put
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 __________. a. $1,980 b. $4,900 c. $5,000 d. $2,080
d. $2,080 Premium = $20.80 * 100 = $2,080
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. a. 1 only b. 2 only c. 1 and 3 only d. 1, 2, and 3
d. 1, 2, and 3
______ option can only be exercised on the expiration date. a. A Mexican b. An Asian c. An American d. A European
d. A European
A European put option gives its holder the right to ______. a. buy the underlying asset the exercise price on or before the expiration date b. buy the underlying asset at the exercise price only at the expiration date c. sell the underlying asset at the exercise price on or before the expiration date d. sell the underlying asset at the exercise price only at the expiration date
d. sell the underlying asset at the exercise price only at the expiration date
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? a. long call and short put b. long call and long put c. short call and short put d. short call and long put
d. short call and long put
The potential loss for a writer of a naked call option on a stock is ______. a. equal to the call premium b. larger the lower the stock price c. limited d. unlimited
d. unlimited
