Exam 4 Chapter 13,15,16,17 sample Questions

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit its risk. A. cross hedging B. short hedging C. spreading D. speculating

B. short hedging

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

4. The clearing corporation has a net position equal to ______. A. the open interest B. the open interest times two C. the open interest divided by two D. zero

D. zero

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

A. Collar

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

*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. covered call

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)

A. Max(0, ST - X)

46. A one-dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar. A. a decrease; less B. a decrease; more C. an increase; less D. an increase; more

C. an increase; less

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

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 call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. negative; positive B. positive; negative C. zero; zero D. zero; positive

D. zero; positive

A call option has an intrinsic value of zero if the option is A. at the money. B. out of the money. C. in the money. D. at the money and in the money. E. at the money and out of the money.

E. at the money and out of the money.

Why and when would you purchase a straddle?

If the stock price is close to the strike price at expiration of the options, the straddle leads to a loss.

A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. a. bearish; bullish b. bullish; bearish c. bearish; false d. bullish; false

a. bearish; bullish

56. A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and the maximum per share gain to the writer of an uncovered call is _________. A. $33.00: $3.50 B. $33.00: $31.50 C. $35.00: $3.50 D. $35.00: $35.00

A. $33.00: $3.50

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. II only

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)

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

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)

Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium the value of this portfolio is ________. A. S0 - Xe-rt B. S0 - X C. S0 + Xe-rt D. S0 + X

A. S0 - Xe-rt

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

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases E. does not change; does not change

A. decreases; increases

The value of a call option increases with all of the following except ___________. A. dividend yield B. time to maturity C. stock price D. volatility

A. dividend yield

At expiration, the time value of an in-the-money put option is always A. equal to zero. B. negative. C. positive. D. equal to the stock price minus the exercise price. E. None of the options

A. equal to zero.

The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A. intrinsic value B. time value C. stated value D. discounted value

A. intrinsic value

The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A. intrinsic value B. time value C. stated value D. discounted value

A. intrinsic value

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. A. liquidity; all traders must trade a small set of identical contracts B. credit risk; all traders understand the risk of the contracts C. pricing; convergence is more likely to take place with fewer contracts D. trading cost; trading volume is reduced

A. liquidity; all traders must trade a small set of identical contracts

57. If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by ________________. A. purchasing out-of-the-money call options B. purchasing at-the-money bull spreads C. purchasing in-the-money call options D. purchasing at-the-money call options

A. purchasing out-of-the-money call options

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with puts, you would _______________. A. sell the 55 put and buy the 45 put B. buy the 45 put and buy the 55 put C. buy the 55 put and sell the 45 put D. sell the 45 put and sell the 55 put

A. sell the 55 put and buy the 45 put

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

Other things equal, the price of a stock put option is positively correlated with the following factors except A. the stock price. B. the time to expiration. C. the stock volatility. D. the exercise price.

A. the stock price.

You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A _________. A. will be higher than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. more information is necessary to answer this question

A. will be higher than the intrinsic value of stock B

*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. , Protective put

Stockholders of Dog's R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating a ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next five years. Given this the firm's optimal dividend payout ratio is now ______. A. 0% B. 100% C. between 0% and 50% D. between 50% and 100%

B. 100%

17. __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's q

B. Liquidation value per share

__________ 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

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

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

Which one of the following will increase the value of a put option? A. a decrease in time to expiration of the put B. an increase in the volatility of the underlying stock C. an increase in stock price D. a decrease in the exercise price

B. an increase in the volatility of the underlying stock

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. A. nominal model B. binomial model C. time model D. Black-Scholes model

B. binomial model

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

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

If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

B. decrease; increase

9. Futures contracts have many advantages over forward contracts except that _________. A. futures positions are easier to trade B. futures contracts are tailored to the specific needs of the investor C. futures trading preserves the anonymity of the participants D. counterparty credit risk is not a concern on futures

B. futures contracts are tailored to the specific needs of the investor

All else equal call option values are _____ if the _____ is lower. A. higher; stock price B. higher; exercise price C. lower; dividend payout D. lower; stock volatility

B. higher; exercise price

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

B. in the money

2. A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

B. increase substantially

29. A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

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

B. long straddle

13. A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. A. has a Tobin's q value < 1 B. will generate a positive alpha C. has an expected return less than its required return D. has a beta > 1

B. will generate a positive alpha

71. An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current stock price is $35.10, what is the break even point for the investor? A. $32.50 B. $35.00 C. $37.50 D. $37.60

C. $37.50

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)

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

20., The constant-growth dividend discount model (DDM) can be used only when the ___________. A. , growth rate is less than or equal to the required return B. , growth rate is greater than or equal to the required return C. , growth rate is less than the required return D. , growth rate is greater than the required return

C. , growth rate is less than the required return

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

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

58. Which one of the following will increase the value of a put option? A. A decrease in the exercise price B. A decrease in time to expiration of the put C. An increase in the volatility of the underlying stock D. An increase in stock price

C. An increase in the volatility of the underlying stock

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (Time T). The sum of all daily settlements will be __________. A. F0 - FT B. F0 - S0 C. FT - F0 D. FT - S0

C. FT - F0

6. Which one of the following contracts requires no cash to change hands when initiated? A. Listed put option B. Short futures contract C. Forward contract D. Listed call option

C. Forward contract

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

C. I, II and III only

9. Which one of the following is a common term for the market consensus value of the required return on a stock? A. Dividend payout ratio B. Intrinsic value C. Market capitalization rate D. Plowback ratio

C. Market capitalization rate

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)

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)

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

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)

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

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.

41. Forward contracts _________ traded on an organized exchange and futures contracts __________ traded on an organized exchange. A. are; are B. are; are not C. are not; are D. are not; are not

C. are not; are

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________. A. long .70 calls for each short stock B. long .70 shares for each long call C. long .70 shares for each short call D. short .70 calls for each long stock

C. long .70 shares for each short call

3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract

C. long futures contract

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. protective put

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

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

C. short put

The _________ is the difference between the actual call price and the intrinsic value. A. stated value B. strike value C. time value D. binomial value

C. time value

89., Which of the following valuation measures is often used to compare firms that have no earnings? A. , Price-to-book ratio B. , P/E ratio C. , Price-to-cash-flow ratio D. , Price-to-sales ratio

D. , Price-to-sales ratio

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

D. European

Hedge ratios for long calls are always _________. A. 1 B. greater than 1 C. between -1 and 0 D. between 0 and 1

D. between 0 and 1

78. The use of leverage is practiced in the futures markets due to the existence of _________. A. banks B. brokers C. clearinghouse D. margin

D. margin

Before expiration the time value of an out-of-the money stock option is __________. A. equal to the stock price minus the exercise price B. equal to zero C. negative D. positive

D. positive

The historical yield spread between AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ______. a. buy the AAA and short the AA b. buy the AA and short the AAA c. buy the the AA and the AAA d. short both the AA and the AAA

a. buy the AAA and short the AA

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.

earnings retention ratio will increase