Investments Chapter 15

C. 100

24. Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. A. 1 B. 10 C. 100 D. 1,000

A. Long call and short put

70. What combination of puts and calls can simulate a long stock investment? 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

73. 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

B. Protective put

76. What strategy could be considered insurance for an investment in a portfolio of stocks? A. Covered call B. Protective put C. Short put D. Straddle

B. CBOE

27. In 1973, trading of standardized options on a national exchange started on the _________. A. AMEX B. CBOE C. NYSE D. CFTC

D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11. An Asian 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 a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

12. A down-and-out option _______________. A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option C. expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option

13. A down-and-in option _______________. A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option C. expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

A. a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option

16. A lookback option provides its holder with _______________. A. a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option B. a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the option C. a payoff if the firm's stock price falls below some specified dollar amount during the term of the option D. a payoff based on the average price of the underlying stock over the life of the option

C. Min(P0, ST - X + P0)

17. 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, X - ST - P0) B. Min(-P0, X - ST - P0) C. Min(P0, ST - X + P0) D. Max(0, ST - X - P0)

B. LEAPS

18. Longer term American style options with maturities of up to three years are called __________. A. warrants B. LEAPS C. GICs D. CATs

A. less than a year

19. The initial maturities of most exchange traded options are generally __________. A. less than a year B. less than 2 years C. between 1 and 2 years D. between 1 and 3 years

C. purchase a futures contract at a specified price for a specified period of time

20. A futures call option provides its holder with the right to ___________. A. purchase a particular stock at some time in the future at a specified price B. purchase a futures contract for the delivery of options on a particular stock C. purchase a futures contract at a specified price for a specified period of time D. deliver a futures contract and receive a specified price at a specific date in the future

D. third Friday

21. Exchange traded stock options expire on the _______________ of the expiration month. A. second Monday B. third Wednesday C. second Thursday D. third Friday

B. agrees to buy shares at a set price if the option holder desires

22. 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

C. Contracts that are tailored to meet the needs of market participants

23. Advantages of exchange traded options over OTC options include all but which one of the following? A. Ease and low cost of trading B. Anonymity of participants C. Contracts that are tailored to meet the needs of market participants D. No concerns about counterparty credit risk

B. $5

25. Exercise prices for listed stock options usually occur in increments of ____, and bracket the current stock price. A. $1 B. $5 C. $20 D. $25

B. long straddle

26. You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

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

28. An American call option gives the buyer 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

B. in the money

29. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is _________. A. at the money B. in the money C. out of the money D. knocked out

D. money spread

30. You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________. A. time spread B. long straddle C. short straddle D. money spread

B. in the money

31. A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. at the money B. in the money C. out of the money D. knocked in

A. covered call

32. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered call B. long straddle C. naked call D. money spread

A. time spread

33. You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

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

34. A European call option gives the buyer 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. protective put

35. You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddle B. naked put C. protective put D. short stroll

C. I, II and III only

36. The value of a listed call option on a stock is lower when _______________. I. the exercise price is higher II. the contract approaches maturity III. the stock decreases in value IV. a stock split occurs A. II, III and IV only B. I, III and IV only C. I, II and III only D. I, II, III and IV

A. the exchanges on which stock options are traded

37. The Option Clearing Corporation is owned by _________. A. the exchanges on which stock options are traded B. the Federal Deposit Insurance Corporation C. the Federal Reserve system D. major U.S. banks

A. II only

38. The value of a listed put option on a stock is lower when _______________. I. the exercise price is higher II. the contract approaches maturity III. the stock decreases in value IV. a stock split occurs A. II only B. II and IV only C. I, II and III only D. I, II, III and IV

A. call premium

39. 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

D. Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

40. Which one of the statements about margin requirements on option positions is not correct? A. The margin required will be higher if the option is in the money. B. If the required margin exceeds the posted margin the option writer will receive a margin call. C. A buyer of a put or call option does not have to post margin. D. Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

D. unlimited

42. 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

A. decrease, decrease

43. 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

C. Asian

45. An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option. A. American B. European C. Asian D. Australian

A. barrier

46. A down-and-out option is one type of ________ option. A. barrier B. lookback C. digital D. Asian

C. digital

47. A "bet" option is also called a ____ option. A. barrier B. lookback C. digital D. foreign exchange

D. OEX

48. Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index? A. SPX B. DJX C. CME D. OEX

D. European

5. A(n) ______ option can only be exercised on the expiration date. A. Mexican B. Asian C. American D. European

B. Writing an uncovered put option

54. __________ is the most risky 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

A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

55. Which one of the following is a correct statement? A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. B. A convertible bond consists of a straight bond plus a specified number of detachable warrants. C. Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year. D. Call options may be convertible into the stock while warrants are not convertible into the stock.

A. American, more, European

6. All else the same, an ______ style option will be ______ valuable than a ______ style option. A. American, more, European B. American, less, European C. American, more, Canadian D. American, less, Canadian

B. Price stability

67. A covered call strategy benefits from what environment? A. Falling interest rates B. Price stability C. Price volatility D. Unexpected events

A. long call

68. If you combine a long stock position with buying an at the money put 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

A. Bull spread

69. Which strategy benefits from upside price movement and has some protection should the price of the security fall? A. Bull spread B. Long put C. Short call D. Straddle

D. Short call and long put

74. Which of the following strategies makes a profit if 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

C. short put

75. 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

A. Collar

77. What strategy is designed to ensure a value within the bounds of two different stock prices? A. Collar B. Covered Call C. Protective put D. Straddle

B. Buy a strap

78. You are convinced that a stock's price will move by at least 15% over the next three months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A. Buy a strip B. Buy a strap C. Buy a straddle D. Write a straddle

B. deep out of the money

79. When issued most convertible bonds are issued _____________. A. deep in the money B. deep out of the money C. slightly out of the money D. slightly in the money

C. Max(0, X - ST)

8. 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)

B. conversion value of the bond

80. A convertible bond is deep in the money. This means the bond price will closely track the __________. A. straight debt value of the bond B. conversion value of the bond C. straight debt value of the bond minus the conversion value D. straight debt value of the bond plus the conversion value

D. I, II and III

81. Warrants differ from listed options in that ________. I. exercise of warrants results in dilution of a firm's earnings per share II. when warrants are exercised new shares of stock must be created III. warrant exercise result in cash flows to the firm whereas exercise of listed options does not A. I only B. I and II only C. II and III only D. I, II and III

B. I and III only

82. Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock and Bond B is not. Bond A is priced at $1,245 and Bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%. The stock of Bond A is trading at $49.80 per share. Which of the following statements is/are correct? I. The value of the conversion option for Bond A is $125. II. The lower promised yield to maturity of Bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. Bond A can be converted into 25 shares of stock. A. II only B. I and III only C. III only D. I, II and III

B. greater; greater

85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell so you are considering purchasing either at the money or out of the money puts. If you decide to purchase the out of the money puts your maximum loss is __________ than if you buy at the money puts and your maximum gain is __________. A. greater; lower B. greater; greater C. lower; greater D. lower; lower

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

9. 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

B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

10. An Asian call 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 a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

D. the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

14. A quanto provides its holder with ______________. A. the right to participate in the payoffs from a portfolio of gambling casino stocks B. the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate C. the right to participate in the investment performance of a foreign security D. the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

A. Max(-C0, ST - X - C0)

15. 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(-C0, ST - X - C0) C. Max(C0, ST - X + C0) D. Max(0, ST - X - C0)

D. sell the underlying asset at the exercise price only at the expiration date

41. A European 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. are not; are

44. 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

A. Max(0, ST - X)

7. 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)

D. I, II and III

87. You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You are considering either using puts or calls to hedge this position. Given this, which of the following statements is/are correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely the hedging with puts is probably better than hedging with short calls. A. I only B. II only C. I and III only D. I, II and III