Fin3826_ch.15

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. covered call

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. the exchanges on which stock options are traded

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you 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

A. time spread

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

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

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

B. deep out of the money

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

B. greater; greater

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

B. in the money

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price 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 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

B. long straddle

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 ______ option. A. an American B. a European C. an Asian D. an Australian

C. an Asian

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. protective put

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

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

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

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

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

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

A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise price B. buying two options that have the same expiration dates but different strike prices C. selling two options that have the same expiration dates but different strike prices D. selling an option with one expiration date and buying a similar option with a different expiration date

D. selling an option with one expiration date and buying a similar option with a different expiration date

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

A. Bull spread

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? A. Buy the call, sell the put; lend the present value of $40. B. Sell the call, buy the put; lend the present value of $40. C. Buy the call, sell the put; borrow the present value of $40. D. Sell the call, buy the put; borrow the present value of $40.

A. Buy the call, sell the put; lend the present value of $40.

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

A. Collar

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 1 year, while warrants have an initial maturity less than 1 year. D. Call options may be convertible into the stock, while warrants are not convertible into the stock.

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

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. II only

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

A. Long call and short put

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)

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)

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

Longer-term American-style options with maturities of up to 3 years are called __________. A. warrants B. LEAPS C. GICs D. CATs

B. LEAPS

______ option can only be exercised on the expiration date. A. A Mexican B. An Asian C. An American D. A European

D. A European

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

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 results 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

D. I, II, and III

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? 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, 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

D. I, II, and III

Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option. A. I and III only B. I and IV only C. I, II, and IV only D. III and IV only

D. III and IV only

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A. SPX B. DJX C. CME D. OEX

D. OEX

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

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

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

D. money spread

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

D. third Friday

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

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

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-

Strips and straps are variations of __________. A. straddles B. collars C. money spreads D. time spreads

A. straddles

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

B. CBOE

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

C. 100

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

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

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)

C. Max (0, X - ST)

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? A. Sell a call. B. Purchase a put. C. Sell a straddle. D. Buy a straddle.

C. Sell a straddle.

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

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 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

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

C. I, II, and III only

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. $5

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

B. conversion value of the bond

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)

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

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

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

C. digital

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

You are convinced that a stock's price will move by at least 15% over the next 3 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. Buy a strap.

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

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

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

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

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

B. Price stability

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. Protective put

__________ 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

B. Writing an uncovered put option