chpt.20

All else equal, call option values are lower A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. A and B. E. A and C.

C. for high dividend payout policies.

Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $104. B. decreases to $90. C. increases to $106. D. decreases to $96. E. none of the above.

C. increases to $106. $100 + $5 = $105 (Breakeven). The price of the stock must increase to above $105 for the option holder to earn a profit.

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $504. B. decreases to $490. C. increases to $506. D. decreases to $496. E. none of the above.

C. increases to $506. $500 + $5 = $505 (Breakeven). The price of the stock must increase to above $505 for the option holder to earn a profit.

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call A. is out of the money. B. is in the money. C. is at the money. D. A and C. E. B and C.

C. is at the money. If the striking price on a call option is equal to the market price, the option is at the money.

The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. none of the above.

C. the call premium

27. A put option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

A call option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. none of the above.

C. the put premium.

The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. all of the above. E. none of the above.

C. the stock price.

Asian options differ from American and European options in that A. they are only sold in Asian financial markets. B. they never expire. C. their payoff is based on the average price of the underlying asset. D. both A and B. E. both A and C

C. their payoff is based on the average price of the underlying asset.

The intrinsic value of an at-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. none of the above.

C. zero.

The intrinsic value of an out-of-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. none of the above.

C. zero.

What happens to an option if the underlying stock has a 3-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C.The exercise price would become one third of what it was and the number of options held would triple. D. The exercise price would triple and the number of options held would triple. E. There is no standard rule - each corporation has its own policy.

C.The exercise price would become one third of what it was and the number of options held would triple.

You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to A. $52. B. $60. C. $68. D. both A and C. E. none of the above.

Call: -$60 + (-$5) + $3 = $68 (Break even); Put: -$3 + $60 + (-$5) = $52 (Break even); thus, if price increases above $68 or decreases below $52, a profit is realized.

Financial engineering A. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. B. primarily takes place for institutional investor. C. primarily takes places for the individual investor. D. A and B. E. A and C.

D. A and B.

The current market price of a share of AT&T stock is $50. If a put option on this stock has a strike price of $45, the put A. is out of the money. B. is in the money. C. sells for a lower price than if the market price of AT&T stock is $40. D. A and C. E. B and C.

D. A and C.

The current market price of a share of CSCO stock is $22. If a put option on this stock has a strike price of $20, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $25. D. A and C. E. B and C.

D. A and C.

The current market price of a share of a stock is $20. If a put option on this stock has a strike price of $18, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $23. D. A and C. E. B and C.

D. A and C.

The lower bound on the market price of a convertible bond is A. its straight bond value. B. its crooked bond value. C. its conversion value. D. A and C. E. none of the above

D. A and C.

An American put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price decrease with less risk than short selling the stock. D. B and C. E. A and C.

D. B and C.

The put-call parity theorem A. represents the proper relationship between put and call prices. B. allows for arbitrage opportunities if violated. C. may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. D. all of the above. E. none of the above.

D. all of the above

A collar with a net outlay of approximately zero is an options strategy that A. combines a put and a call to lock in a price range for a security. B. uses the gains from sale of a call to purchase a put. C. uses the gains from sale of a put to purchase a call. D. both A and B. E. both A and C.

D. both A and B.

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. cannot tell without further information

D. decrease; decrease

Currency-Translated Options have A. only asset prices denoted in a foreign currency. B. only exercise prices denoted in a foreign currency. C. have payoffs that only depend on the maximum price of the underlying asset during the life of the option. D. either asset or exercise prices denoted in a foreign currency. E. none of the above.

D. either asset or exercise prices denoted in a foreign currency.

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the A. strike price B. exercise price C. execution price D. strike price or exercise price E. strike price or execution price

D. strike price or exercise price

All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. none of the above.

D. the expected rate of return on the stock.

The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of AT&T stock is $40. D. A and C. E. B and C.

E. B and C.

The current market price of a share of CAT stock is $76. If a put option on this stock has a strike price of $80, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. A and C. E. B and C.

E. B and C.

The current market price of a share of Disney stock is $30. If a put option on this stock has a strike price of $35, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. A and C. E. B and C.

E. B and C.

The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put A. is in the money. B. is out of the money. C. sells for a lower price than if the market price of JNJ stock is $50. D. A and C. E. B and C.

E. B and C.

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. A and C. E. B and C.

E. B and C.

The current market price of a share of PALM stock is $75. If a put option on this stock has a strike price of $79, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. A and C. E. B and C.

E. B and C.

The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of CSCO stock is $21. D. A and C. E. B and C

E. B and C. If the striking price on a call option is less than the market price, the option is in the money and sells for more than a less in the money option.

The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. A and C. E. B and C.

E. B and C. If the striking price on a call option is less than the market price, the option is in the money and sells for more than an at the money option.

European call option allows the buyer to A. sell the underlying asset at the exercise price on the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. buy the underlying asset at the exercise price on the expiration date. E. C and D.

E. C and D

A European put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price decrease with less risk than short selling the stock. D. sell the underlying asset at the striking price on the expiration date. E. C and D.

E. C and D.

Protective puts offer an advantage over stop-loss orders in that A . the stop-loss order will be executed as soon as the stock price reaches the trigger point, without allowing for a subsequent rebound, while the put allows the holder to wait. B. the stop-loss order is costless to place. C. the stop-loss order may actually be executed at a price below the trigger price. D. both A and B are true. E. both A and C are true.

E. both A and C are true.

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the A. strike price B. exercise price C. execution price D. strike price or exercise price E. none of the above

E. none of the above

Exchange-traded stock options expire A. on the first day of the expiration month. B. on the last day of the expiration month. C. on the 15th day of the expiration month. D. on the first Monday of the expiration month. E. on the third Friday of the expiration month.

E. on the third Friday of the expiration month.

The price that the buyer of a call option pays to acquire the option is called the A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. premium

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A. strike price B. exercise price C. execution price D. strike price or execution price E. strike price or exercise price

E. strike price or exercise price

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the A. strike price B. exercise price C. execution price D. strike price or execution price E. strike price or exercise price

E. strike price or exercise price

The minimum tick size for a CBOE option selling above $3 is ________. A. $1.00 B. $0.375 C. $0.50 D. $0.25 E. $0.125

For options trading below $, the minimum tick size is 1/16 = $0.0625. For all other options on the CBOE the minimum tick size is 1/8 = $0.125.

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk free interest rate is 5.5%. What is the price of a one-year put with strike price of $58? A. $10.00 B. $12.12 C. $16.00 D. $11.97 E. $14.13

P = 10 - 53 + 58/(1.05.5); P = 11.97

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk free interest rate is 4%. What is the price of a one-year put with strike price of $45? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $14.26

P = 9 - 38 + 45/(1.04); P = 14.26

HighFlyer Stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk free interest rate is 6%. What is the price of a one-year put with strike price of $55? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $15.60

P = 9 - 48 + 55/(1.06); P = 12.89

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2 If, at expiration, the price of a share of IBM stock is $103, your profit would be A. $500. B. $300. C. zero. D. $100. E. none of the above.

$103 - $100 = $3 - $5 = -$2; +$2; $0 X 100 = $0.

You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position? A. $50 B. $55 C. $45 D. $40 E. none of the above

+$50 - $5 = $45.

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position? A. $65 B. $75 C. $5 D. $70 E. none of the above

+$70 - $5 = $65

You purchase one IBM 70 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is A. $98 B. $64 C. $76 D. $70 E. none of the above

+70 + $6 = $76.

You purchase one JNJ 75 call option for a premium of $3. Ignoring transaction costs, the break-even price of the position is A. $75 B. $72 C. $3 D. $78 E. none of the above

+75 + $3 = $78.

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2 The maximum potential profit of your strategy is A. $600. B. $500. C. $200. D. $300. E. $100

-$100 - $5 = -$105; + $2 + $105 = $107; $2 x 100 = $200.

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy? A. $4,800 B. $200 C. $5,000 D. $5,200 E. none of the above

-$200 + $5,000 = $4,800 (if the stock falls to zero.)

You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy? A. $7,000 B. $400 C. $7,400 D. $6,600 E. none of the abov

-$400 + $7,000 = $6,600 (if the stock falls to zero.)

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2 The maximum loss you could suffer from your strategy is A. $200. B. $300. C. zero. D. $500. E. none of the above.

-$5 + $2 = -$3 X 100 = -$300.

You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be A. $500. B. $300. C. $800. D. $200. E. none of the above.

-$5 + (-$3) = -$8 X 100 = $800.

You purchase one IBM March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? A. $10,000 B. $10,600 C. $9,400 D. $9,000 E. none of the above

-$600 + $10,000 = $9,400 (if the stock falls to zero.)

Suppose that you purchased a call option on the S&P 100 index. The option has an exercise price of 680 and the index is now at 720. What will happen when you exercise the option? A. You will have to pay $680. B. You will receive $720. C. You will receive $680. D. You will receive $4,000. E. You will have to pay $4,000.

720 - 680 = 40 times the $100 multiplier, or $4,000. In other words, you are implicitly buying the index for 680 and selling it to the call writer for 720.

Suppose that you purchased a call option on the S&P 100 index. The option has an exercise price of 700 and the index is now at 760. What will happen when you exercise the option? A. You will have to pay $6,000. B. You will receive $6,000. C. You will receive $700. D. You will receive $760. E. You will have to pay $7,000.

760 - 700 = 60 times the $100 multiplier, or $6,000. In other words, you are implicitly buying the index for 700 and selling it to the call writer for 760.

Currency options and currency futures options have different values because A . the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at expiration. B . the payoff on the currency option depends on the exchange rate futures price at expiration, while the currency futures option's payoff depends on the exchange rate at expiration. C. currency options are American while currency futures options are European. D. currency futures options are American while currency options are European. E. currency options are quoted in U.S. dollars while currency futures options are quoted in the foreign currency.

A . the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at expiration.

A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. none of the above.

A. a long put plus a long position in the underlying asset.

An American call option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. none of the above.

A. any time on or before the expiration date.

An American put option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. none of the above.

A. any time on or before the expiration date.

The current market price of a share of Boeing stock is $75. If a put option on this stock has a strike price of $70, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. A and C. E. B and C.

A. is out of the money.

The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call A. is out of the money. B. is in the money. C. can be exercised profitably. D. A and C. E. B and C.

A. is out of the money. If the striking price on a call option is more than the market price, the option is out of the money and cannot be exercised profitably

A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

A put option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

Lookback options have payoffs that A.have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option. B. have payoffs that only depend on the minimum price of the underlying asset during the life of the option. C. have payoffs that only depend on the maximum price of the underlying asset during the life of the option. D. are known in advance. E. none of the above.

A.have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option.

Barrier Options have payoffs that A.have payoffs that only depend on the minimum price of the underlying asset during the life of the option. B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. C. are known in advance. D. have payoffs that only depend on the maximum price of the underlying asset during the life of the option. E. none of the above.

A.have payoffs that only depend on the minimum price of the underlying asset during the life of the option.

To adjust for stock splits A.the exercise price of the option is reduced by the factor of the split and the number of option held is increased by that factor. B. the exercise price of the option is increased by the factor of the split and the number of option held is reduced by that factor. C. the exercise price of the option is reduced by the factor of the split and the number of option held is reduced by that factor. D. the exercise price of the option is increased by the factor of the split and the number of option held is increased by that factor. E. none of the above

A.the exercise price of the option is reduced by the factor of the split and the number of option held is increased by that factor.

You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called A. a short straddle. B. a long straddle. C. a horizontal straddle. D. a covered call. E. none of the above.

B. a long straddle.

All else equal, call option values are higher A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. A and B. E. A and C.

B. for low dividend payout policies.

Trading in "exotic options" takes place A. on the New York Stock Exchange. B. in the over-the-counter market. C. on the American Stock Exchange. D. in the primary marketplace. E. none of the above.

B. in the over-the-counter market.

The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put A. is in the money. B. is out of the money. C. sells for a higher price than if the market price of the stock is $75. D. A and C. E. B and C.

B. is out of the money.

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher. A. more; more B. more; less C. less; more D. less; less E. It doesn't matter - they are too risky to be included in a reasonable person's portfolio.

B. more; less

16. A European put option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid. E. none of the above.

B. only on the expiration date.

A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid. E. none of the above.

B. only on the expiration date.

A covered call position is equivalent to a A. long put. B. short put. C. long straddle. D. vertical spread. E. none of the above.

B. short put.

Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call. E. none of the above.

B. the actual call price minus the intrinsic value of the call.

According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to: A. the call value plus the present value of the exercise price plus the stock price. B. the call value plus the present value of the exercise price minus the stock price. C. the present value of the stock price minus the exercise price minus the call price. D. the present value of the stock price plus the exercise price minus the call price. E. none of the above.

B. the call value plus the present value of the exercise price minus the stock price.

The Option Clearing Corporation is owned by A. the Federal Reserve System. B. the exchanges on which stock options are traded. C. the major U.S. banks. D. the Federal Deposit Insurance Corporation. E. none of the above.

B. the exchanges on which stock options are traded.

A put option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price An out of the money put option gives the owner the right to sell the shares for less than market price.

A call option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put

B. the exercise price is less than the stock price.

The potential loss for a writer of a naked call option on a stock is A. limited B. unlimited C. larger the lower the stock price. D. equal to the call premium. E. none of the above.

B. unlimited

The intrinsic value of an at-the-money call option is equal to A. the call premium. B. zero. C. the stock price plus the exercise price. D. the striking price. E. none of the above.

B. zero.

The intrinsic value of an out-of-the-money call option is equal to A. the call premium. B. zero. C. the stock price minus the exercise price. D. the striking price. E. none of the above.

B. zero.

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? A. $17.50 B. $15.26 C. $10.36 D. $12.26 E. none of the above

C = 103 - 100/(1.05) + 7.50; C = $15.26.

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? A. $4.38 B. $5.60 C. $6.23 D. $12.26 E. none of the above.

C = 48 - 45/(1.04) + 1.50; C = $6.23.

What happens to an option if the underlying stock has a 2-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become half of what it was and the number of options held would double. D. The exercise price would double and the number of options held would double. E. There is no standard rule - each corporation has its own policy.

C. The exercise price would become half of what it was and the number of options held would double.

You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as A. a vertical spread. B. a straddle. C. a horizontal spread. D. a collar. E. none of the above.

C. a horizontal spread. A horizontal or time spread involves the simultaneous purchase and sale of options with different expiration dates, same exercise price.

A callable bond should be priced the same as A. a convertible bond. B. a straight bond plus a put option. C. a straight bond plus a call option. D. a straight bond plus warrants. E. a straight bond.

C. a straight bond plus a call option.

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a vertical spread. D. a short straddle. E. none of the above.

C. a vertical spread. A vertical or money spread involves the purchase one option and the simultaneous sale of another with a different exercise price and same expiration date

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

An option with an exercise price equal to the underlying asset's price is A. worthless. B. in the money. C. at the money. D. out of the money. E. theoretically impossible.

C. at the money.

The price that the writer of a call option receives to sell the option is called the A. strike price B. exercise price C. execution price D. acquisition price E. premium

premium

Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2 What is the lowest stock price at which you can break even? A. $101. B. $102. C. $103. D. $104. E. none of the above.

x = $100 + $5 - $2; x = $103

Call options on IBM listed stock options are A. issued by IBM Corporation. B. created by investors. C. traded on various exchanges. D. A and C. E. B and C.

E. B and C.

An American call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. A and C. E. B and C.

E. B and C

A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

D. the purchase of a share of stock with a simultaneous sale of a call on that stock.

Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them. B. a large contingent of investors holds them. C. the writers may choose whether or not to exercise them. D. their payoffs depend on the prices of other assets. E. contingency management is used in adding them to portfolios.

D. their payoffs depend on the prices of other assets.

The value of a stock put option is positively related to A. the time to expiration. B. the striking price. C. the stock price. D. all of the above. E. A and B.

E. A and B.

Binary Options A. are based on two possible outcomes - yes or no. B. may make a payoff of a fixed amount if a specified event happens. C. may make a payoff of a fixed amount if a specified event does not happen. D. A and B only. E. A, B, and C

E. A, B, and C

Some more "traditional" assets have option-like features; some of these instruments include A. callable bonds. B. convertible bonds. C. warrants. D. A and B. E. A, B, and C.

E. A, B, and C.

Which of the following factors affect the price of a stock option A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. A, B, and C.

E. A, B, and C.

You purchased a call option for $3.45 seventeen days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return? A. 173.9%, -100% B. 73.9%, -100% C. 57.5%, -173.9% D. 73.9%, -57.5% E. 100%, -100%

If the call is exercised the gross profit is $51 - 45 = $6. The net profit is $6 - 3.45 = $2.55. The holding period return is $2.55/$3.45 = .739 (73.9%). If the call is not exercised, there is no gross profit and the investor loses the full amount of the premium. The return is ($0 - 3.45)/$3.45 = -1.00 (-100%).