Fin 334 Final

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

A) $100

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.

A) leverage.

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.

A) their lifespan.

Jaime 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 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

A.) $23.50

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

A.) $375, $125

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.) $380

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%

A.) 150%

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.) January, February, April, and July.

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.

A.) Saturday, October 17

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.

A.) a call option on the Canadian dollar will increase.

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

A.) buy a call

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.

A.) contractual price at which each of the shares of the underlying stock can be bought.

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.) market becomes more volatile.

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.) reduce or eliminate risk.

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

B.) $12

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.

B.) ETF shares.

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.) February 125 call

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.

B.) buying S&P 500 Index put options.

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.) conservative investment position with limited profits.

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.) increases when the yield on the underlying Treasury security rises.

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.

B.) is betting the price of the underlying security will increase in value.

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.

B.) most options expire unexercised

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

B.) purchase of a call

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.

B.) the issuing corporation decides to sweeten a bond issue.

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.

B.) the market price of the underlying financial asset is less than the strike price.

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.) time until expiration and the strike price.

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as A) writing a naked call. B) writing a covered call. C) creating a naked cover. D) covering a short position.

B.) writing a covered call.

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

C.) $0.00

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.) $14

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.

C.) $2,640.

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.) $28

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.

C.) $3,250

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.) $336.

Bob's DJIA Index option had a strike price of 98. When he exercised the option, the Dow was at 10,050. A) Bob received $2,050 from the writer of the contract. B) Bob paid $250 to the writer of the contract. C) Bob received $250 from the writer of the contract. D) Bob received $700 from the writer of the contract.

C.) Bob received $250 from the writer of the contract.

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.) LEAP calls.

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.

C.) LEAPS typically have a higher quoted price than that of a regular option.

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.

C.) They are a type of short-lived call option.

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

C.) buy a put

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.

C.) have a stipulated price and an expiration date.

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.

C.) have readily available price information.

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.

C.) on the third Friday of the expiration month.

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.) one unit of the foreign currency is worth $1.63.

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.) party who writes the option.

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.

C.) price behavior of the underlying common stock.

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.

C.) the price at which the underlying stock can be sold.

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.) vertical spread.

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) Chicago Board Options Exchange

If the S&P 500 index is at 1,061, then the cash value of an S&P 500 index option is A) $10.61. B) $1,061. C) $10,610. D) $106,100.

D.) $106,100.

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

D.) $300

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.

D.) 6 put options with a strike price of $50.

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

D.) I, II, III, and IV

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.) Option holders can profit on movements of the price of the underlying security.

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.

D.) have the right to buy or sell a certain number of underlying shares.

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.

D.) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

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.) that may have an expiration date as long as three years.