ACE 222 Last Exam
As an option gets closer to its expiration date, A. time value increases B. intrinsic value must increase C. time value decays D. intrinsic value must decrease
C. Time value decay
The time value of an option at expiration is A. the difference between strike price and futures price. B. always negative. C. always positive. D. always zero
D. always zero
To profit if prices fall
When a farmer uses a fence strategy, what is the reason for buying the put? A. To profit if prices fall B. To profit if prices rise C. To offset basis risk D. Buying the put creates a ceiling price
In the videos, Professor Stoddard refers to Time Value as a."Who cares?" value b."What if?" value c."Why not?" value d."What for?" valu
"What if?" value
Sell the grain to the elevator and sell the put at the same time
A farmer buys a put for downside protection. At Time 2, this farmer will a. Sell the grain and hold the put until prices have decreased enough that it's in the money b. Sell the grain to the elevator and buy another put at the same time c. Sell the grain to the elevator and sell the put at the same time d. Sell the grain to the elevator and buy call to offset the put position
if the futures price rises, the put will expire worthless, but the corn will increase in value
A farmer owns cash corn and buys a put to mitigate price risk. Which is true? a. if the futures price fall, the put will expire worthless, but the corn will increase in value b. if the futures price rises, the put will expire worthless, but the corn will increase in value c. if the futures price rises, the put will increase in value as the value of the corn decreases d. if the futures price fall, the put will expire worthless and the corn will decrease in value
There was more intrinsic value at Time 1 than there is at Time 2
A former ACE 222 student buys at 900 call at Time 1 when the futures price is 980. At Time 2, the futures price has fallen to 785. Which is true? a.There was more intrinsic value at Time 1 than there is at Time 2 b.The call is worth more at Time 2 than it was at Time 1 c.If the call is exercised at Time 2, then that futures position is liquidated, the result is a positive number d.The premium at Time 1 was entirely time value
There was more intrinsic value at Time 1 than there is at Time 2
A former ACE 222 student buys at 900 put at Time 1 when the futures price is 820. At Time 2, the futures price has risen to 985. Which is true? a.There was more intrinsic value at Time 1 than there is at Time 2 b.If the put is exercised at Time 2, then that futures position is liquidated, the result is a positive number c.The put is worth more at Time 2 than it was at Time 1 d.The premium at Time 2 is entirely intrinsic value
Sell a call
A person who is bearish would a. Buy a call b. Sell a call c. Sell a put d. Buy futures
Buy a call
A person who is bullish would a. Buy a put b. Sell a call c. Buy a call d. Sell futures
the futures price will have to rise by 29 cents
A speculator is looking at a July 430 corn call that has a premium of 19 cents; futures are currently at 420. If the speculator buys this option for 19 cents, what will have to happen for it to be worth that amount at expiration? a. the futures price will have to fall by 9 cents b. the futures price will have to fall by 19 cents c. the futures price will have to rise by 19 cents d. the futures price will have to rise by 29 cents
option sellers are required to post margins and might receive margin calls
A trader who begins a trade by selling an option has potentially unlimited losses just as if they were trading a futures contract so A.option sellers are required to buy options with a different strike price to limit their risk B.option sellers are required to have offsetting positions in the physical commodity to limit their risk C.option sellers are required to always take an offsetting futures position to limit their risk D.option sellers are required to post margins and might receive margin calls
sell a put option
A trader who is bullish would A. sell a futures contract B. sell a put option C. buy a put option D. sell a call
Jennifer is considering selling her cash corn and replacing it with calls. One advantage to this strategy is that it allows her to A. Eliminate storage and interest costs on the cash corn B. Benefit if basis improves later C. Buy cheap out of the money calls that are guaranteed to expire at a profit D. Profit in both the cash market and options market if prices increase
A. Eliminate storage and interest costs on the cash corn
As stated in the video, in order for many option strategies to be profitable, prices must move __________ ___________ and ___________ __________ A. Far enough and fast enough B. High enough and low enough C. Quick enough and high enough D. Slow enough and high enough
A. Far enough and fast enough
Which is true? a. Some options have time value, but don't have any intrinsic value b. Some options have intrinsic value, but don't have any time value c. Some options have no intrinsic value and no time value d. All out of the money options have intrinsic value
A. Some options have time value, but don't have any intrinsic value
A farmer who says he's going to use an option strategy to "buy downside protection" is planning to A. Buy a put B. Buy a call C. Sell a put D. Buy a futures contract
A. buy a put
if the futures price is the same at expiration as it is now, all of the 5 cents will go away
An option trader is looking at an out of the money December call with a premium of 5 cents and 6 trading days left until expiration. Which is true? a. if the futures price increases by less than 5 cents between now and expiration, the time value will be higher at expiration b. if the futures price decreases between now and expiration, the time value will be higher at expiration c. if the futures price increases by more than 5 cents between now and expiration, the time value will be higher at expiration d. if the futures price is the same at expiration as it is now, all of the 5 cents will go away
A corn producer who buys a put might refer to that as putting in a price __________ A. Wall B. Barrier C. Ceiling D. Floor
D. floor
In the money
Puts that have strike prices above the future price are a. beside the money b. at the money c. out of the money d. In the money
Time is expensive
When a farmer considers buying a put for downside protection, often the problem is a. Time is expensive b. Time is cheap c. The out of the money puts tend to cost quite a bit more than the in the money puts d. The least expensive choice of options usually has the most time until expiration, so time decay will be an issue
the strike price of the put minus the net premium paid plus the basis at Time 2
When a farmer uses a fence strategy, the floor price will be A. the strike price of the put minus the net premium paid plus the basis at Time 2 B. the strike price of the put minus the net premium paid plus the basis at Time 1 C. The strike price of the call minus the net premium paid plus the basis at Time 2 D. The strike price of the call minus the net premium paid plus the basis at Time 1
To receive the premium and use that to partially offset the cost of the put
When a farmer uses a fence strategy, what is the reason for selling the call? A.To receive the premium and use that to partially offset the cost of the put B.To profit if prices rise C.To offset basis risk D.To create a floor price
A fence
When a farmer who owns a commodity simultaneously buys a put and sells a call, this is referred to as A. A covered call B. Buying a put for downside protection C. A fence D. A covered put
you don't have to exercise the option to capture the increase in value; you can simply sell it because the premium will equal to the amount you'd get by exercising
You own an option that's out of the money, then prices move, and your option is now in the money. Which is true? A.the only way to capture the increase in value is to exercise it B.you don't have to exercise the option to capture the increase in value; you can simply sell it because the premium will equal to the amount you'd get by exercising C.it will always be worth less than the amount by which it's in the money D.you wouldn't want to exercise because the value now will be less than when it was out of the money
you don't have to exercise the option to capture the increase in value; you can simply sell it because the premium will now be higher
You own an option that's out of the money, then prices move, and your option is now in the money. Which is true? A.the only way to capture the increase in value is to exercise it B.you don't have to exercise the option to capture the increase in value; you can simply sell it because the premium will now be higher C.it will always be worth less than the amount by which it's in the money D.the value now will be less than when it was out of the money
One reason farmers often choose out of the money options rather than at the money options is A. Because they're more expensive to purchase B. Because they're cheaper to purchase C. Because they cover basis risk better D. Because the amount by which they're in the money is guaranteed profit
B. Because they're cheaper to purchase
When an ACE 222 student asks themselves, "If I exercised this option, then liquidated that futures position, would I get a negative or positive number?", they are trying to a. calculate basis b. calculate intrinsic value c. calculate net cash price paid for a long hedge d. calculate net cash price received for a short hedge
B. calculate intrinsic value
A former ACE 222 student buys at 900 call at Time 1 when the futures price is 820. At Time 2, the futures price has risen to 985. Which is true? a. There was more intrinsic value at Time 1 than there is at Time 2 b. The call was worth more at Time 1 than it is at Time 2 c. The call is worth more at Time 2 than it was at Time 1 d. premium at Time 2 is entirely time value
C. The call is worth more at Time 2 than it was at Time 1
One problem mentioned in the videos with respect to with using options to hedge price risk is A. Intrinsic value is very expensive for out of the money options B. Most agricultural options are illiquid C. Time value is very expensive D. Time value is very cheap
C. time value is very expensive
If you exercise a put, A. you are then long a futures contract at the strike price B. you are then short in the cash market at the strike price C. you are then short a futures contract at the strike price D. you are then long in the cash market at the strike price
C. you are then short a futures contract at the strike price
out of the money
Calls that have strike prices above the future price are a. beside the money b. at the money c. out of the money d. In the money
In the money
Calls that have strike prices below the future price are a. beside the money b. at the money c. out of the money d. In the money
Options expire a. whenever the buyer and seller of the option agree to schedule the expiration b. in the month following the underlying futures contract c. in the same month as the underlying futures contract d. in the month prior to the underlying futures contract month
D. in the month prior to the underlying futures contract month
A trader is looking at an at the money May 2020 call and an at the money July 2020 call. Which is true? A. the May call will be worth more because it has more intrinsic value B. the July call will be worth more because it has more intrinsic value C. the May call will be worth more because it has more time value D. the July call will be worth more because it has more time value
D. the July call will be worth more because it has more time value
the strike price of the put plus the basis at Time 2 minus the premium paid for the put
If a farmer buys a put in order to establish a floor price, the floor price is equal to A. the strike price of the put minus the futures price at Time 2 minus the premium paid for the put B. the strike price of the put plus the basis at Time 1 minus the premium paid for the put C. the strike price of the put plus the basis at Time 2 minus the premium paid for the put D. the strike price of the put plus the futures price at Time 1 minus the premium paid for the put
generally move in the same direction
If someone looks at a chart of futures prices and a chart of call premiums for the same time period, they will see that call premiums and the futures price a. always move in the same direction by the same amount b. generally move in the same direction c. generally move in opposite directions, as if each were the mirror image of the other d. never move in the same direction
generally move in opposite directions, as if each were approximately the mirror image of the other
If someone looks at a chart of futures prices and a chart of put premiums for the same time period, they will see that put premiums and the futures price a. always move in the same direction by the same amount b. generally move in the same direction c. generally move in opposite directions, as if each were approximately the mirror image of the other d. never move in the same direction
you have enough information to calculate both intrinsic value and time value
If you know the strike price of an option, the current futures price, and the option premium a. you have enough information to calculate intrinsic value, but not time value b. you have enough information to calculate both intrinsic value and time value c. you have enough information to calculate time value, but not intrinsic value d. you have enough information to calculate whether it will be in the money or out of the money at expiration
often, the farmer is likely to be interested in options when prices are already volatile, so premiums are relatively high
One problem with options for farmers is a. often, the farmer is likely to be interested in options when prices are already volatile, so premiums are relatively high b. the margin calls associated with buying a put or call tend to make bankers nervous c. options are only available through some grain elevators, and many elevators don't offer them d. bankers don't like the limited liability associated with buying a put or call
to have downside protection (make some money on the put if prices fall) and still leave the upside open (make money on the cash corn if prices rise)
One reason a farmer might buy a put is a. a desire to lock in current basis b. fear that prices will rise c. to have downside protection (make some money on the put if prices fall) and still leave the upside open (make money on the cash corn if prices rise) d. to make money on the put if prices rise while simultaneously making money on the corn if prices rise
option sellers are required to post margins and might receive margin calls
Potential losses for option sellers are similar to potential losses on futures contracts; therefore A.option sellers are required to buy options with a different strike price to limit their risk B.option sellers are required to have offsetting positions in the physical commodity to limit their risk C.option sellers are required to always take an offsetting futures position to limit their risk D.option sellers are required to post margins and might receive margin calls
out of the money
Puts that have strike prices below the future price are a. beside the money b. at the money c. out of the money d. In the money
an option seller
The best case scenario for _____________________ is for the option to expire out of the money A.an option buyer B.an option seller C.the exchange D.the owners of the underlying physical commodity
an option buyer
The best case scenario for _____________________ is for the option to move in the money, and to that A.an option buyer B.an option seller C.the exchange D.the owners of the underlying physical commodity
isn't constant throughout the life of the option; it increases close to expiration
The rate of time decay a. is constant throughout the life of the option b. isn't constant throughout the life of the option; it increases close to expiration c. isn't constant throughout the life of the option; it decreases close to expiration d. is constant if the option is out of the money; time decay ceases once an option becomes in the money
means that all time value will disappear by expiration date for all options
Time decay a. means that all time value will disappear by expiration date for all options b. means that all time value will disappear by expiration date for out of the money options c. means that all time value will disappear by expiration date for in the money options d. means that all time value will disappear by expiration date for at the money options
Time value decreases at an increasing rate as the expiration date approaches. This is called time value appreciation B.time value decay C.futures convergence D.arbitrage
Time value decay
a hockey stick
When a farmer buys a put for downside protection, the diagram that shows futures prices on the horizontal axis and the net price the farmer will receive on the vertical axis is commonly described as having the shape of a. a two hockey sticks, with one being the mirror image of the other b. a tennis racket c. a cross d. a hockey stick
is less than the strike price of the put
When a farmer buys a put for downside protection, the floor price a. is less than the strike price of the put b. is more than the strike price of the put c. is equal to the strike price of the put d. is equal to the strike price minus the basis at Time 1
the out of the money option is cheaper
When a farmer buys a put for downside protection, they often will choose an out of the money option rather than an at the money option or in the money option. Why? A. the out of the money option is cheaper B. The out of the money option will become profitable with a smaller price move than an at the money option C. The out of the one option will become profitable with a smaller price move than an in the money option D. The out of the money option is more expensive which is usually what the farmer prefers
In the part of the price range where the call is losing money, the put is out of the money and will expire worthless
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. In the part of the price range where the call is losing money, the put is also losing money b. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time c. In the part of the price range where the call is losing money, the put is out of the money and will expire worthless d. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times
in the part of the price range where the put is making money, the call is out of the money and will expire worthless
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. in the part of the price range where the put is making money, the call is out of the money and will expire worthless c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the call is in the money, the put is also in the money
In the part of the price range where the put is making money, the cash grain is losing value at exactly the same rate and the gains on the put exactly offset the losses on the cash grain
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. the farmer has established a floor price and a ceiling price and there is no basis risk c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the put is making money, the cash grain is losing value at exactly the same rate and the gains on the put exactly offset the losses on the cash grain
the farmer has established a floor price and a ceiling price, but there is still basis risk
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. the farmer has established a floor price and a ceiling price, but there is still basis risk c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the call is in the money, the put is also in the money
in the part of the price range where the put is making money, the call is out of the money and will expire worthless
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. in the part of the price range where the put is making money, the call is out of the money and will expire worthless c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the call is in the money, the put is also in the money
In the part of the price range where the call is losing money, the cash grain is gaining value at exactly the same rate and the gains on the cash grain exactly offset the losses on the call position
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. the farmer has established a floor price and a ceiling price and there is no basis risk c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the call is losing money, the cash grain is gaining value at exactly the same rate and the gains on the cash grain exactly offset the losses on the call position
the farmer has established a floor price and a ceiling price, but there is still basis risk
When a farmer uses a Fence option strategy and will exit the position on the day of option expiration (so time value is zero) which is true? a. Professor Stoddard recommends entering the put and call positions at different times, but exiting them at the same time b. the farmer has established a floor price and a ceiling price, but there is still basis risk c. Professor Stoddard recommends entering the put and call positions at the same time, but exiting them at different times d. In the part of the price range where the call is in the money, the put is also in the money
The strike price of the call minus the net premium paid plus the basis at Time 2
When a farmer uses a fence strategy, the ceiling price will be A. the strike price of the put minus the net premium paid plus the basis at Time 2 B. the strike price of the put minus the net premium paid plus the basis at Time 1 C. The strike price of the call minus the net premium paid plus the basis at Time 2 D. The strike price of the call minus the net premium paid plus the basis at Time 1
equal to the strike price plus the premium paid to acquire the call
When a trader is long a call option, on expiration day (when there is zero time value) the breakeven futures price (i.e., the price where the trader can sell the option for at least the amount they paid for it) is a. equal to the strike price b. equal to the strike price plus the premium paid to acquire the call c. equal to the strike price minus the premium paid to acquire the call d. always below the strike price
the out of the money put costs less than an at the money or in the money put
When farmers buy a put for downside protection, they often choose a put that is out of the money because a. out of the money puts have more time to expiration than in the money puts b. out of the money puts aren't impacted by time decay c. an out of the money put will go up more as futures prices rise d. the out of the money put costs less than an at the money or in the money put
risk is unlimited, so they have to put up margin money just like they would if they made a futures trade
When someone has no open positions, then begins a trade by selling an option which is true? a. risk is unlimited, so they have to put up margin money just like they would if they made a futures trade b. risk is limited to the premium they receive minus the commission they pay c. risk is limited to an amount equal to the strike price minus the premium they paid d. risk is limited to the premium they receive plus the commission they pay
they will make money if, at expiration, the futures price is less than the sum of the strike price plus the premium
When someone sells a call a. their risk is limited to the premium paid plus commission paid b. they will make money if, at expiration, the futures price is at the strike price c. they will make money if, at expiration, the futures price is less than the sum of the strike price plus the premium d. their risk is limited to the premium received minus the commission paid
When the buyer of a call makes money, the seller of that call loses exactly the same amount of money
Which is true? a. When the buyer of a call makes money, the buyer of the corresponding put loses exactly the same amount of money b. When the buyer of a call makes money, the seller of the corresponding put loses exactly the same amount of money c. When the buyer of a call makes money, the seller of that call loses exactly the same amount of money d. When the buyer of a call makes money, the seller of the corresponding futures contract loses exactly the same amount of money
an at the money call with 6 months to expiration
Which will have the greatest time value? a. a put that is 2 dollars out of the money with 6 months to expiration b. a call that is 2 dollars out of the money with 6 months to expiration c. an at the money call with 6 months to expiration d. an at the money call with 2 months to expiration
They think prices will do down or sideways, and premium will decrease
Why would someone sell a call? a. They think prices will do down or sideways, and premium will decrease b. They think prices will go up and premium will increase c. They think prices will go up and premium will decrease d. They think prices will go down or sideways, and premium will increase
They think prices will go up or sideways, and premium will decrease
Why would someone sell a put? a. They think prices will go up or sideways, and premium will decrease b. They think prices will go up or sideways and premium will increase c. The think prices will go down and premium will decrease d. They think prices will do down or sideways, and premium will increase
if prices fall, the gains on the put will offset part of the loss in value of the corn
farmer owns cash corn and buys a put to mitigate price risk. Which is true? a. if prices rise, the gains on the put will offset all of the loss in value of the corn b. if prices rise, the gains on the put will offset part of the loss in value of the corn c. if prices fall, the gains on the put will offset part of the loss in value of the corn d. if prices fall, the gains on the put will offset all of the loss in value of the corn
As described in the videos, to simplify things in ACE 222, we think of option premium as consisting of a. one part b. two parts c. three parts d. four parts
two parts
