FIN 334 - CH 14 (ON FINAL)

D

A long straddle A) consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security. B) is a strategy based on the expectation that the price of the underlying security will be relatively constant. C) consists of buying a call at one strike price and then writing a call at a higher strike price. D) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

B

A put has fundamental value as long as A) the market price of the underlying financial asset has a positive value. B) the market price of the underlying financial asset is less than the strike price. C) the strike price of the put is greater than the time premium of the put. D) the strike price of the put is less than the market value of the underlying asset.

C

Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison's position from now until the option expiration date? I. Her maximum loss is $3,625. II. Her maximum loss is $125. III. Her minimum gain is $125. IV. Her maximum profit is unlimited. A) I and IV only B) II and III only C) II and IV only D) II, III and IV only

B

An American call option gives the owner A) the right to buy or sell the stock at the strike price on or before the expiration date. B) the right but not the obligation to buy the stock at the strike price on or before the expiration date. C) the right and the obligation to buy the stock at the strike price on or before the expiration date. D) the right but not the obligation to sell the stock at the strike price on or before the expiration date.

C

An investor who exercises a call option on a S&P 500 ETF will A) purchase ETF shares at the strike price. B) receive a cash settlement equivalent to the difference between the strike price and the current level of the index. C) receive a cash settlement equivalent to the difference between the strike price and 100 times the current level of the index. D) receive a cash settlement equivalent to the difference between the strike price and the current price of the ETF.

B

Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes. A) $10 B) $12 C) $8 D) cannot be determined from the information provided

C

Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens. He should buy A) ETF calls. B) LEAP puts. C) LEAP calls. D) Index calls.

C

Bill owns 200 shares of EG stock. In November, the market price of EG was $15.45. Bill sold two March 16 calls on EG for $246. Between November and March, EG stock fluctuated between $14.75 and $15.85. EG paid a quarterly dividend of $0.40 per share on January 31. Over the November-March period, Bill earned A) $80. B) $(176). C) $336. D) $256.

C

Bob's DJIA Index option had a strike price of 125. When he exercised the option, the Dow was at 13,050. A) Bob received $5,500 from the writer of the contract. B) Bob paid $550 to the writer of the contract. C) Bob received $550 from the writer of the contract. D) Bob received $55,000 from the writer of the contract.

B

ETF options are settled in A) cash. B) ETF shares. C) share of the companies in the index. D) The writer has the choice of settling in either cash or ETF shares.

A

For a call purchased on an organized security exchange, the strike price specifies the A) contractual price at which each of the shares of the underlying stock can be bought. B) prevailing market price of one share of the underlying stock. C) cost of buying one option contact based on the value of the underlying stock. D) intrinsic value of the offsetting put.

C

For all practical purposes, listed stock options always expire A) on the last business day of the expiration month. B) on the first Monday of every calendar quarter. C) on the third Friday of the expiration month. D) three months from the date of the option purchase.

D

Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy A) 600 call options with a strike price of $55. B) 600 put options with a strike price of $50. C) 6 call options with a strike price of $55. D) 6 put options with a strike price of $50.

A

Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs. A) $380 B) $480 C) $500 D) $600

A

If the Canadian dollar became stronger relative to the U.S. dollar, the price of A) a call option on the Canadian dollar will increase. B) a put option on the Canadian dollar will increase. C) a call option on the Canadian dollar will decrease. D) both the call and the put options on the Canadian dollar will decrease.

D

If the S&P 500 index is at 1,461, then the cash value of an S&P 500 index option is A) $14.61. B) $1,461. C) $14,610. D) $146,100.

B

In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit? I. the writer of the call II. the buyer of the call III. the writer of the put IV. the buyer of the put A) II and III B) I and III C) only III D) II and IV

A

In nearly all cases, the purpose of a hedge is to A) reduce or eliminate risk. B) make a very high profit in an extremely short time frame. C) speculate on a downward drop in a general market index. D) speculate on an upward movement in a given currency.

A

Jamie wrote a nine-month put on Beta stock. The strike price was $25 and the market price at the time the option was written was $24. The total price of the option contract was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes. A) $23.50 B) $24.00 C) $25.00 D) $26.50

C

Jason purchased a six-month put on ABC stock at a cost of $100. The strike price was $15. At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes. A) $15 B) $16 C) $14 D) cannot be determined from the information provided

C

Justin owns 400 shares of ORNG stock which he bought 10 months ago at $20 per share and has now risen to $35 per share. He is afraid the stock price will fall before he has owned it for a full year, but wants to postpone realizing profits on the stock for several months, when it will become a long-term rather than short-term gain. He can protect his profit and avoid the short-term capital gains rate by A) writing covered calls. B) writing puts. C) buying puts. D) buying calls.

C

Kyle believes the price of Ajax stock is about to decrease. If he wants to profit from the decline in price, he should ________ on Ajax stock. A) buy a call B) write a put C) buy a put D) sell a put

D

LEAPS are a special type of option A) that must be exercised within six months. B) that can only be exercised on the expiration date. C) that cannot be exercised for at least a year after it is is purchased. D) that may have an expiration date as long as three years.

D

LEAPS is an acronym for A) Lehman and Ellsworth Authority Strips. B) Liability & Equity Asset Securities. C) LYONS Earnings Anticipation Stocks. D) Long-Term Equity Anticipation Securities.

C

Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes. A) $22 B) $25 C) $28 D) cannot be determined from the information provided

C

Listed options A) are traded directly between the buyer and the seller. B) are rarely traded in the secondary markets. C) have readily available price information. D) are sold over the counter.

B

Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has I. limited her losses to $275. II. unlimited loss potential. III. limited her gains to $275. IV. unlimited profit potential. A) I and IV only B) II and III only C) I and III only D) II and IV only

A

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ________ and his maximum gain is ________. A) $375, $125 B) $375, unlimited C) $500, $125 D) $275, $125

B

NZMA stock is currently selling for $128. Which of the following options is "in-the-money"? A) March 130 call B) February 125 call C) March 125 put D) February 100 put

B

Nowel Inc. stock is currently priced at $42. The present value of the strike price of a call option on this stock is $44. Probability one, as calculated by the Black Scholes option pricing model is .6541; probability 2 is .3722. The value of this option as calculated by Black-Scholes is A) $(2.00). B) $11.10. C) $2.000. D) $10.71.

B

One could temporarily protect profits on a highly diversified portfolio of large company stocks by A) selling S&P 500 Index put options. B) buying S&P 500 Index put options. C) buying S&P 500 Index call options. D) selling S&P 500 Index call options.

A

One of the major disadvantages of options is A) their lifespan. B) their cost. C) their lack of liquidity. D) the risk to option buyers.

B

One reason that writing options can be a viable and profitable investment strategy is that A) the option writer collects the quarterly dividends. B) most options expire unexercised. C) an option writer determines when the option is exercised. D) an option writer can exercise the option to avoid a potential loss.

D

Purchasers of stock options A) own a financial asset with benefits of firm ownership. B) have a claim on the profits of the firm issuing the underlying securities. C) have the obligation to buy or sell a predetermined amount of shares at the strike price. D) have the right to buy or sell a certain number of underlying shares.

B

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information? I. Rex's option is worth at least $100 today. II. Rex's option is worthless today. III. Rex's option has more value today than when he bought it. IV. Rex's option has less value today than when he bought it. A) I and III only B) I and IV only C) II and III only D) II and IV only

C

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract? A) $100 B) $350 C) $3,250 D) Her profit potential is unlimited.

D

Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct? I. short the stock II. buy a call at 50 III. write a call at 55 IV. buy a put at 45 A) II and IV only B) I and III only C) III and IV only D) I, III and IV only

C

Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of A) $200. B) $240. C) $2,640. D) $3,000.

D

Stock index options can be used for which of the following investment purposes? I. protect a portfolio from market declines II. speculate on the price appreciation of a particular common stock III. take advantage of a leverage opportunity IV. create a portfolio hedge A) I and IV only B) II and IV only C) I and III only D) I, III and IV only

A

Stocks options that trade in the January cycle will have contracts available that expire in A) January, February, April, and July. B) March, June, September, December. C) January, February, March, and April. D) each of the next 12 months.

A

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as A) leverage. B) straddling. C) hedging. D) triple witching.

B

The buyer of a listed American option has which of the following rights? I. the right to change the expiration date II. the right to change the strike price III. the right to resell the option IV. the right to let the option expire unexercised A) I and III only B) III and IV only C) I, III and IV only D) II, III and IV only

C

The currency option strike price of 163 means that A) $1 is worth 1.63 units of the foreign currency. B) $1 is worth 163 units of the foreign currency. C) one unit of the foreign currency is worth $1.63. D) one unit of the foreign currency is worth $163.

C

The maker of a put or call is the A) company which issued the underlying security. B) person who facilitates the trade on the floor of the exchange. C) party who writes the option. D) party who decides whether or not the option is exercised.

C

The most important factor affecting the market price of a put or call is the A) market interest rate. B) expiration date. C) price behavior of the underlying common stock. D) price behavior of the corresponding warrant.

A

The option premium is A) the market price of the option. B) the amount by which the stock price is expected to move before the option expires. C) the fee charged by the options exchanges for executing transactions. D) the difference between the strike price and the underlying price of the security.

A

The premium on a stock index call would be expected to increase as the A) market becomes more volatile. B) option life nears expiration. C) index price falls further below the strike price. D) underlying securities stabilize in value.

A

The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes. A) 150% B) 200% C) 250% D) 300%

C

The purchase of a June 25 call on XXO stock and the sale of a June 30 call on XXO stock is known as a A) long straddle. B) short straddle. C) vertical spread. D) horizontal spread.

C

The strike price of a put option is the price A) an investor must pay for the options contract. B) of the underlying stock at the time that the options contract is purchased. C) the price at which the underlying stock can be sold. D) the price at which the underlying stock can be bought.

B

The two provisions which investors should carefully consider when evaluating stock options are the A) strike price and the exchange ratio. B) time until expiration and the strike price. C) leverage ratio and the time to maturity. D) premium and the discount.

B

The value of an interest rate call option A) varies directly with the price of the underlying corporate bond. B) increases when the yield on the underlying Treasury security rises. C) is based on the market price of U. S. Treasury securities. D) decreases when the price of U.S. Treasuries decreases.

B

The writer of a covered call has taken a(n) A) conservative investment position with unlimited potential profits. B) conservative investment position with limited profits. C) aggressive position with limited losses and unlimited potential profits. D) aggressive position with potentially unlimited profits or losses.

B

The writer of a put A) accepts the obligation to sell a predetermined number of shares at a predetermined price. B) is betting the price of the underlying security will increase in value. C) is hoping that the put will be in-the-money prior to expiration. D) will pay the premium whether or not the option is exercised.

A

Tiffany would like to own shares of Blackwood, Inc. but only if she can acquire them at a total cost of $30 a share or less. Blackwood is currently trading at $31.76. Cynthia should ________ with a strike price of $30. Ignore transaction costs. A) buy a call B) buy a put C) write a call D) write a put

C

Warrants A) provide substantially less capital appreciation potential than the underlying stock. B) tend to be quite costly. C) have a stipulated price and an expiration date. D) are not traded in the secondary markets because of their low unit costs.

B

Warrants are generally created when A) a firm decides to execute a stock split. B) the issuing corporation decides to sweeten a bond issue. C) a LEAP expires and automatically converts. D) a financial institution decides to create them based on market conditions.

D

What is the fundamental value of a call with a strike price of $30 and a market price of $33? A) -$300 B) -$3 C) $3 D) $300

C

What is the fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26? A) $150 B) $100 C) $0.00 D) -$100

A

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24? A) $100 B) $200 C) $300 D) $400

D

Which of the following affect the value of puts and calls written on shares of common stock? I. price volatility of the underlying stock II. current market price of the underlying stock III. length of time until the option expiration date IV. current market interest rate A) I and II only B) I, II and III only C) II, III and IV only D) I, II, III and IV

A

Which of the following increase(s) the time premium of a call option? I. a market price that exceeds the strike price II. increasing volatility in the market price of the underlying security III. decreasing market interest rates IV. decreasing the time to option expiration A) II only B) I and II only C) III and IV only D) II and III only

A

Which of the following is a possible official expiration date for a standardized option contract? A) Saturday, October 17 B) Monday, March 1 C) Friday, April 30 D) Wednesday, May 19

C

Which of the following is true about rights? A) They are usually attached to bonds as a "sweetener." B) The owner has several years in which to exercise the option. C) They are a type of short-lived call option. D) They are a type of short-lived put option.

D

Which of the following methods might be used to protect a profit on a diversified portfolio of stocks? A) Buy S&P 500 Index put options. B) Buy put options on a S & P 500 based ETF. C) Write S&P 500 Index put options. D) Either A or B, but not C.

B

Which of the following represent in-the-money options? I. a call when the market price exceeds the strike price II. a call when the strike price exceeds the market price III. a put when the market price exceeds the strike price IV. a put when the strike price exceeds the market price A) I and III only B) I and IV only C) II and III only D) II and IV only

C

Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS) is correct? A) LEAPS are traded solely in the over-the-counter market. B) LEAPS are options that are available only on individual common stocks. C) LEAPS typically have a higher quoted price than that of a regular option. D) LEAPS generally have a longer life than a warrant.

D

Which of the following statements concerning options are correct? I. Options are derivative securities. II. The value of an option is dependent upon the value of the underlying security. III. The seller of the option retains the option premium whether or not the option is exercised. IV. Options can provide leverage benefits. A) II and III only B) I, II and III only C) I, II and IV only D) I, II, III and IV

C

Which of the following variables are part of the Black-Scholes option pricing model? I. the market price of the underlying stock II. the volatility of the underlying security III. the strike price of the option IV. the risk-free rate of interest V. the beta of the underlying security VI. the time remaining before the option expires A) I, II, IV and VI only B) I, II and III only C) I, II, III, IV and VI only D) I, II, III, IV, V and VI

B

Which one of the following actions would be the most appropriate hedge to a short sale of common stock? A) sale of a call B) purchase of a call C) sale of a put D) purchase of a put

D

Which one of the following statements concerning options is correct? A) One option covers 1,000 shares of stock. B) A put gives the option holder the right to buy a stated amount of securities. C) The owner of a call is entitled to the dividends paid on the underlying shares of stock. D) Option holders can profit on movements of the price of the underlying security.

D

Which one of the following was the first listed exchange for stock options in the United States? A) Stock Index Board B) Philadelphia Board of Trade C) New York Stock Exchange D) Chicago Board Options Exchange

D

Writers of option contracts A) have a limited liability specified in the contract. B) hope to exercise the option on favorable terms. C) earn a commission no matter what subsequently happens to the contract. D) earn a profit when the option expires without being exercised.