ch 20 options markets: introduction

8/18/2019 ch 20 Options Markets: Introduction

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Chapter 20 - Options Markets: Introduction

Chapter 20

Options Markets: Introduction

Multiple Choice Questions

1. The price that the buyer of a call option pays to acquire the option is called the. strike price.!. e"ercise price.C. e"ecution price.#. acquisition price.$. pre%iu%.

2. The price that the &riter of a call option recei'es to sell the option is called the

. strike price.!. e"ercise price.C. e"ecution price.#. acquisition price.$. pre%iu%.

(. The price that the buyer of a put option pays to acquire the option is called the. strike price.!. e"ercise price.

C. e"ecution price.#. acquisition price.$. pre%iu%.

). The price that the &riter of a put option recei'es to sell the option is called the. pre%iu%.!. e"ercise price.C. e"ecution price.#. acquisition price.

$. strike price.

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*. The price that the buyer of a call option pays for the underlyin+ asset if she e"ecutes heroption is called the. strike price.!. e"ercise price.

C. e"ecution price.#. strike price or e"ecution price.$. strike price or e"ercise price.

,. The price that the &riter of a call option recei'es for the underlyin+ asset if the buyere"ecutes her option is called the. strike price.!. e"ercise price.C. e"ecution price.

#. strike price or e"ercise price.$. strike price or e"ecution price.

. The price that the buyer of a put option recei'es for the underlyin+ asset if she e"ecutes heroption is called the. strike price.!. e"ercise price.C. e"ecution price.#. strike price or e"ecution price.

$. strike price or e"ercise price.

. The price that the &riter of a put option recei'es for the underlyin+ asset if the option ise"ercised is called the. strike price.!. e"ercise price.C. e"ecution price.#. strike price or e"ercise price.$. /one of these is correct.

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. n %erican call option allo&s the buyer to. sell the underlyin+ asset at the e"ercise price on or before the e"piration date.!. buy the underlyin+ asset at the e"ercise price on or before the e"piration date.C. sell the option in the open %arket prior to e"piration.

#. sell the underlyin+ asset at the e"ercise price on or before the e"piration date and sell theoption in the open %arket prior to e"piration.$. buy the underlyin+ asset at the e"ercise price on or before the e"piration date and sell theoption in the open %arket prior to e"piration.

10. $uropean call option allo&s the buyer to. sell the underlyin+ asset at the e"ercise price on the e"piration date.!. buy the underlyin+ asset at the e"ercise price on or before the e"piration date.C. sell the option in the open %arket prior to e"piration.

#. buy the underlyin+ asset at the e"ercise price on the e"piration date.$. sell the option in the open %arket prior to e"piration and buy the underlyin+ asset at thee"ercise price on the e"piration date.

11. n %erican put option allo&s the holder to. buy the underlyin+ asset at the strikin+ price on or before the e"piration date.!. sell the underlyin+ asset at the strikin+ price on or before the e"piration date.C. potentially benefit fro% a stock price increase.#. sell the underlyin+ asset at the strikin+ price on or before the e"piration date and

potentially benefit fro% a stock price increase.$. buy the underlyin+ asset at the strikin+ price on or before the e"piration date and potentially benefit fro% a stock price increase.

12. $uropean put option allo&s the holder to. buy the underlyin+ asset at the strikin+ price on or before the e"piration date.!. sell the underlyin+ asset at the strikin+ price on or before the e"piration date.C. potentially benefit fro% a stock price increase.#. sell the underlyin+ asset at the strikin+ price on the e"piration date.

$. potentially benefit fro% a stock price increase and sell the underlyin+ asset at the strikin+ price on the e"piration date.

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1(. n %erican put option can be e"ercised. any ti%e on or before the e"piration date.!. only on the e"piration date.C. any ti%e in the indefinite future.

#. only after di'idends are paid.$. /one of these is correct.

1). n %erican call option can be e"ercised. any ti%e on or before the e"piration date.!. only on the e"piration date.C. any ti%e in the indefinite future.#. only after di'idends are paid.$. /one of these is correct.

1*. $uropean call option can be e"ercised. any ti%e in the future.!. only on the e"piration date.C. if the price of the underlyin+ asset declines belo& the e"ercise price.#. i%%ediately after di'idends are paid.$. /one of these is correct.

1,. $uropean put option can be e"ercised. any ti%e in the future.!. only on the e"piration date.C. if the price of the underlyin+ asset declines belo& the e"ercise price.#. i%%ediately after di'idends are paid.$. /one of these is correct.

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1. To adust for stock splits. the e"ercise price of the option is reduced by the factor of the split and the nu%ber ofoptions held is increased by that factor.!. the e"ercise price of the option is increased by the factor of the split and the nu%ber of

options held is reduced by that factor.C. the e"ercise price of the option is reduced by the factor of the split and the nu%ber ofoptions held is reduced by that factor.#. the e"ercise price of the option is increased by the factor of the split and the nu%ber ofoptions held is increased by that factor.$. /one of these is correct

1. ll else equal call option 'alues are lo&er. in the %onth of May.

!. for lo& di'idend payout policies.C. for hi+h di'idend payout policies.#. in the %onth of May and for lo& di'idend payout policies.$. in the %onth of May and for hi+h di'idend payout policies.

1. ll else equal call option 'alues are hi+her. in the %onth of May.!. for lo& di'idend payout policies.C. for hi+h di'idend payout policies.

#. in the %onth of May and for lo& di'idend payout policies.$. in the %onth of May and for hi+h di'idend payout policies.

20. The current %arket price of a share of T3T stock is 4*0. If a call option on this stock hasa strike price of 4)* the call. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the %arket price of T3T stock is 4)0.#. is out of the %oney and sells for a hi+her price than if the %arket price of T3T stock is

4)0.$. is in the %oney and sells for a hi+her price than if the %arket price of T3T stock is 4)0.

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21. The current %arket price of a share of !oein+ stock is 4*. If a call option on this stockhas a strike price of 40 the call. is out of the %oney.!. is in the %oney.

C. sells for a hi+her price than if the %arket price of !oein+ stock is 40.#. is out of the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is40.$. is in the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is 40.

22. The current %arket price of a share of C5CO stock is 422. If a call option on this stock hasa strike price of 420 the call. is out of the %oney.!. is in the %oney.

C. sells for a hi+her price than if the %arket price of C5CO stock is 421.#. is out of the %oney and sells for a hi+her price than if the %arket price of C5CO stock is421.$. is in the %oney and sells for a hi+her price than if the %arket price of C5CO stock is 421.

2(. The current %arket price of a share of #isney stock is 4(0. If a call option on this stockhas a strike price of 4(* the call. is out of the %oney.!. is in the %oney.

C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.$. is in the %oney and can be e"ercised profitably.

2). The current %arket price of a share of CT stock is 4,. If a call option on this stock has astrike price of 4, the call. is out of the %oney.!. is in the %oney.C. is at the %oney.

#. is out of the %oney and is at the %oney.$. is in the %oney and is at the %oney.

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2*. The current %arket price of a share of MOT stock is 42). If a call option on this stock hasa strike price of 42) the call. is out of the %oney.!. is in the %oney.

C. is at the %oney.#. is out of the %oney and is at the %oney.$. is in the %oney and is at the %oney.

2,. The current %arket price of a share of I!M stock is 40. If a call option on this stock has astrike price of 40 the call. is out of the %oney.!. is in the %oney.C. is at the %oney.

#. is out of the %oney and is at the %oney.$. is in the %oney and is at the %oney.

2. put option on a stock is said to be out of the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

2. put option on a stock is said to be in the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

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2. put option on a stock is said to be at the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.

#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

(0. call option on a stock is said to be out of the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

(1. call option on a stock is said to be in the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

(2. call option on a stock is said to be at the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

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((. The current %arket price of a share of 6/6 stock is 4,0. If a put option on this stock has astrike price of 4** the put. is in the %oney.!. is out of the %oney.

C. sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.#. is in the %oney and sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.$. is out of the %oney and sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.

(). The current %arket price of a share of a stock is 40. If a put option on this stock has astrike price of 4* the put. is in the %oney.!. is out of the %oney.C. sells for a lo&er price than if the %arket price of the stock is 4*.

#. is in the %oney and sells for a lo&er price than if the %arket price of the stock is 4*.$. is out of the %oney and sells for a lo&er price than if the %arket price of the stock is 4*.

(*. The current %arket price of a share of a stock is 420. If a put option on this stock has astrike price of 41 the put. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the strike price of the put option &as 42(.#. is out of the %oney and sells for a hi+her price than if the strike price of the put option &as

42(.$. is in the %oney and sells for a hi+her price than if the strike price of the put option &as42(.

(,. The current %arket price of a share of MOT stock is 41*. If a put option on this stock hasa strike price of 420 the put. is out of the %oney.!. is in the %oney.C. can be e"ercised profitably.

#. is out of the %oney and can be e"ercised profitably.$. is in the %oney and can be e"ercised profitably.

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(. The current %arket price of a share of 78M stock is 4*. If a put option on this stock hasa strike price of 4 the put. is out of the %oney.!. is in the %oney.


(. The current %arket price of a share of T3T stock is 4*0. If a put option on this stock hasa strike price of 4)* the put. is out of the %oney.!. is in the %oney.C. sells for a lo&er price than if the %arket price of T3T stock is 4)0.

#. is out of the %oney and sells for a lo&er price than if the %arket price of T3T stock is4)0.$. is in the %oney and sells for a lo&er price than if the %arket price of T3T stock is 4)0.

(. The current %arket price of a share of !oein+ stock is 4*. If a put option on this stockhas a strike price of 40 the put. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the %arket price of !oein+ stock is 40.

#. is out of the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is40.$. is in the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is 40.

)0. The current %arket price of a share of C5CO stock is 422. If a put option on this stock hasa strike price of 420 the put. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the strike price of the put option &as 42*.

#. is out of the %oney and sells for a hi+her price than if the strike price of the put option &as42*.$. is in the %oney and sells for a hi+her price than if the strike price of the put option &as42*.

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)1. The current %arket price of a share of #isney stock is 4(0. If a put option on this stockhas a strike price of 4(* the put. is out of the %oney.!. is in the %oney.


)2. The current %arket price of a share of CT stock is 4,. If a put option on this stock has astrike price of 40 the put. is out of the %oney.!. is in the %oney.C. can be e"ercised profitably.

#. is out of the %oney and can be e"ercised profitably.$. is in the %oney and can be e"ercised profitably.

)(. 8ookback options ha'e payoffs that. depend in part on the %ini%u% or %a"i%u% price of the underlyin+ asset durin+ the life of the option.!. only depend on the %ini%u% price of the underlyin+ asset durin+ the life of the option.C. only depend on the %a"i%u% price of the underlyin+ asset durin+ the life of the option.#. are kno&n in ad'ance.

$. /one of these is correct.

)). !arrier Options ha'e payoffs that. ha'e payoffs that only depend on the %ini%u% price of the underlyin+ asset durin+ the lifeof the option.!. depend both on the asset9s price at e"piration and on &hether the underlyin+ asset9s pricehas crossed throu+h so%e barrier.C. are kno&n in ad'ance.#. ha'e payoffs that only depend on the %a"i%u% price of the underlyin+ asset durin+ the life

of the option.$. /one of these is correct.

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)*. Currency-Translated Options ha'e. only asset prices denoted in a forei+n currency.!. only e"ercise prices denoted in a forei+n currency.C. ha'e payoffs that only depend on the %a"i%u% price of the underlyin+ asset durin+ the life

of the option.#. either asset or e"ercise prices denoted in a forei+n currency.$. /one of these is correct.

),. !inary Options. are based on t&o possible outco%esyes or no.!. %ay %ake a payoff of a fi"ed a%ount if a specified e'ent happens.C. %ay %ake a payoff of a fi"ed a%ount if a specified e'ent does not happen.#. are based on t&o possible outco%esyes or no and %ay %ake a payoff of a fi"ed a%ount

if a specified e'ent happens.$. Options are based on t&o possible outco%es—yes or no %ay %ake a payoff of a fi"ed

a%ount if a specified e'ent happens and %ay %ake a payoff of a fi"ed a%ount if a specifiede'ent does not happen.

). The %a"i%u% loss a buyer of a stock call option can suffer is equal to. the strikin+ price %inus the stock price.!. the stock price %inus the 'alue of the call.C. the call pre%iu%.

#. the stock price.$. /one of these is correct.

). The %a"i%u% loss a buyer of a stock put option can suffer is equal to. the strikin+ price %inus the stock price.!. the stock price %inus the 'alue of the call.C. the put pre%iu%.#. the stock price.$. /one of these is correct.

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). The lo&er bound on the %arket price of a con'ertible bond is. its strai+ht bond 'alue.!. its crooked bond 'alue.C. its con'ersion 'alue.

#. its strai+ht bond 'alue and its con'ersion 'alue.$. /one of these is correct.

*0. The potential loss for a &riter of a naked call option on a stock is. li%ited.!. unli%ited.C. lar+er the lo&er the stock price.#. equal to the call pre%iu%.$. /one of these is correct.

*1. ;ou &rite one 6/6 <ebruary 0 put for a pre%iu% of 4*. I+norin+ transactions costs &hatis the breake'en price of this position=. 4,*!. 4*C. 4*#. 40$. /one of these is correct.

*2. ;ou purchase one 6/6 * call option for a pre%iu% of 4(. I+norin+ transaction costs the break-e'en price of the position is. 4*.!. 42.C. 4(.#. 4.$. /one of these is correct.

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*(. ;ou &rite one T3T <ebruary *0 put for a pre%iu% of 4*. I+norin+ transactions costs&hat is the breake'en price of this position=. 4*0!. 4**

C. 4)*#. 4)0$. /one of these is correct.

*). ;ou purchase one I!M 0 call option for a pre%iu% of 4,. I+norin+ transaction costs the break-e'en price of the position is. 4.!. 4,).C. 4,.

#. 40.$. /one of these is correct.

**. Call options on I!M listed stock options are. issued by I!M Corporation.!. created by in'estors.C. traded on 'arious e"chan+es.#. issued by I!M Corporation and traded on 'arious e"chan+es.$. created by in'estors and traded on 'arious e"chan+es.

*,. !uyers of call options >>>>>>>>>> required to post %ar+in deposits and sellers of putoptions >>>>>>>>>> required to post %ar+in deposits.. are? are not!. are? areC. are not? are#. are not? are not$. are al&ays? are so%eti%es

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*. !uyers of put options anticipate the 'alue of the underlyin+ asset &ill >>>>>>>>>> andsellers of call options anticipate the 'alue of the underlyin+ asset &ill >>>>>>>.. increase? increase!. decrease? increase

C. increase? decrease#. decrease? decrease$. Cannot tell &ithout further infor%ation.

*. The Option Clearin+ Corporation is o&ned by. the <ederal @eser'e 5yste%.!. the e"chan+es on &hich stock options are traded.C. the %aor A. 5. banks.#. the <ederal #eposit Insurance Corporation.


*. co'ered call position is. the si%ultaneous purchase of the call and the underlyin+ asset.!. the purchase of a share of stock &ith a si%ultaneous sale of a put on that stock.C. the short sale of a share of stock &ith a si%ultaneous sale of a call on that stock.#. the purchase of a share of stock &ith a si%ultaneous sale of a call on that stock.$. the si%ultaneous purchase of a call and sale of a put on the sa%e stock.

,0. ccordin+ to the put-call parity theore% the 'alue of a $uropean put option on a non-di'idend payin+ stock is equal to:. the call 'alue plus the present 'alue of the e"ercise price plus the stock price.!. the call 'alue plus the present 'alue of the e"ercise price %inus the stock price.C. the present 'alue of the stock price %inus the e"ercise price %inus the call price.#. the present 'alue of the stock price plus the e"ercise price %inus the call price.$. /one of these is correct.

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,1. protecti'e put strate+y is. a lon+ put plus a lon+ position in the underlyin+ asset.!. a lon+ put plus a lon+ call on the sa%e underlyin+ asset.C. a lon+ call plus a short put on the sa%e underlyin+ asset.

#. a lon+ put plus a short call on the sa%e underlyin+ asset.$. /one of these is correct.

,2. 5uppose the price of a share of Boo+le stock is 4*00. n pril call option on Boo+lestock has a pre%iu% of 4* and an e"ercise price of 4*00. I+norin+ co%%issions the holder of the call option &ill earn a profit if the price of the share. increases to 4*0).!. decreases to 4)0.C. increases to 4*0,.

#. decreases to 4),.$. /one of these is correct.

,(. 5uppose the price of a share of I!M stock is 4100. n pril call option on I!M stock hasa pre%iu% of 4* and an e"ercise price of 4100. I+norin+ co%%issions the holder of the calloption &ill earn a profit if the price of the share. increases to 410).!. decreases to 40.C. increases to 410,.

#. decreases to 4,.$. /one of these is correct.

,). ;ou purchased one T3T March *0 call and sold one T3T March ** call. ;our strate+yis kno&n as. a lon+ straddle.!. a horiontal spread.C. a %oney spread.#. a short straddle.


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,*. ;ou purchased one T3T March *0 put and sold one T3T pril *0 put. ;our strate+y iskno&n as. a 'ertical spread.!. a straddle.

C. a ti%e spread.#. a collar.$. /one of these is correct.

,,. !efore e"piration the ti%e 'alue of a call option is equal to. ero.!. the actual call price %inus the intrinsic 'alue of the call.C. the intrinsic 'alue of the call.#. the actual call price plus the intrinsic 'alue of the call.


,. Dhich of the follo&in+ factors affect the price of a stock option. the risk-free rate.!. the riskiness of the stock.C. the ti%e to e"piration.#. the e"pected rate of return on the stock.$. the risk-free rate the riskiness of the stock and the ti%e to e"piration.

,. ll of the follo&in+ factors affect the price of a stock option except . the risk-free rate.!. the riskiness of the stock.C. the ti%e to e"piration.#. the e"pected rate of return on the stock.$. /one of these is correct.

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,. The 'alue of a stock put option is positi'ely related to the follo&in+ factors except . the ti%e to e"piration.!. the strikin+ price.C. the stock price.

#. ll of these are correct.$. /one of these is correct.

0. The 'alue of a stock put option is positi'ely related to. the ti%e to e"piration.!. the strikin+ price.C. the stock price.#. all listed ans&ers.$. the ti%e to e"piration and the strikin+ price.

1. ;ou purchase one 5epte%ber *0 put contract for a put pre%iu% of 42. Dhat is the%a"i%u% profit that you could +ain fro% this strate+y=. 4)00!. 4200C. 4*000#. 4*200$. /one of these is correct.

2. ;ou purchase one 6une 0 put contract for a put pre%iu% of 4). Dhat is the %a"i%u% profit that you could +ain fro% this strate+y=. 4000!. 4)00C. 4)00#. 4,,00$. /one of these is correct.

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(. ;ou purchase one I!M March 100 put contract for a put pre%iu% of 4,. Dhat is the%a"i%u% profit that you could +ain fro% this strate+y=. 410000!. 410,00

C. 4)00#. 4000$. /one of these is correct.

). The follo&in+ price quotations &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one <ebruary 0 call contract is. 4(.12*0.!. 4(1.00.C. 4(12.*0.#. 4*.00.$. /one of these is correct.

*. The follo&in+ price quotations on I!M &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one I!M <ebruary 0 call contract is. 4).12*0.!. 4)1.00.C. 4)12.*0.#. 41*.00.$. /one of these is correct.

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,. The follo&in+ price quotations on I!M &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one I!M <ebruary * call contract is. 4.*.!. 4.*0.C. 4)12.*0.#. 41*.00.$. /one of these is correct

5uppose you purchase one I!M May 100 call contract at 4* and &rite one I!M May 10* callcontract at 42.

. The %a"i%u% potential profit of your strate+y is >>>>>>>> if both options are e"ercised.. 4,00!. 4*00C. 4200#. 4(00$. 4100

. If at e"piration the price of a share of I!M stock is 410( your profit &ould be. 4*00.!. 4(00.C. ero.#. 4200.$. /one of these is correct.

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. The %a"i%u% loss you could suffer fro% your strate+y is. 4200.!. 4(00.C. ero.

#. 4*00.$. /one of these is correct.

0. Dhat is the lo&est stock price at &hich you can break e'en=. 4101.!. 4102.C. 410(.#. 410).$. /one of these is correct.

;ou buy one Eero" 6une ,0 call contract and one 6une ,0 put contract. The call pre%iu% is4* and the put pre%iu% is 4(.

1. ;our strate+y is called. a short straddle.!. a lon+ straddle.

C. a horiontal straddle.#. a co'ered call.$. /one of these is correct.

2. ;our %a"i%u% loss fro% this position could be. 4*00.!. 4(00.C. 400.#. 4200.


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(. t e"piration you break e'en if the stock price is equal to. 4*2.!. 4,0.C. 4,.

#. 4*2 and 4,.$. /one of these is correct.

). The put-call parity theore%. represents the proper relationship bet&een put and call prices.!. allo&s for arbitra+e opportunities if 'iolated.C. %ay be 'iolated by s%all a%ounts but not enou+h to earn arbitra+e profits oncetransaction costs are considered.#. ll of these are correct.


*. 5o%e %ore FtraditionalF assets ha'e option-like features? so%e of these instru%entsinclude. callable bonds.!. con'ertible bonds.C. &arrants.#. callable bonds and con'ertible bonds.$. callable bonds con'ertible bonds and &arrants.

,. <inancial en+ineerin+. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the price of the underlyin+ security.!. pri%arily takes place for institutional in'estor.C. pri%arily takes places for the indi'idual in'estor.#. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the price of the underlyin+ security and pri%arily takes place for institutional in'estor.$. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the

price of the underlyin+ security and pri%arily takes places for the indi'idual in'estor.

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. collar &ith a net outlay of appro"i%ately ero is an options strate+y that. co%bines a put and a call to lock in a price ran+e for a security.!. uses the +ains fro% sale of a call to purchase a put.C. uses the +ains fro% sale of a put to purchase a call.

#. co%bines a put and a call to lock in a price ran+e for a security and uses the +ains fro%sale of a call to purchase a put.$. co%bines a put and a call to lock in a price ran+e for a security and uses the +ains fro% saleof a put to purchase a call.

. Top <li+ht 5tock currently sells for 4*(. one-year call option &ith strike price of 4*sells for 410 and the risk free interest rate is *.*G. Dhat is the price of a one-year put &ithstrike price of 4*=. 410.00

!. 412.12C. 41,.00#. 411.$. 41).1(

. Hi+h<lyer 5tock currently sells for 4). one-year call option &ith strike price of 4**sells for 4 and the risk free interest rate is ,G. Dhat is the price of a one-year put &ith strike price of 4**=. 4.00

!. 412.C. 41,.00#. 41.2$. 41*.,0

0. I/B 5tock currently sells for 4(. one-year call option &ith strike price of 4)* sells for4 and the risk free interest rate is )G. Dhat is the price of a one-year put &ith strike price of 4)*=. 4.00

!. 412.C. 41,.00#. 41.2$. 41).2,

20-2(




1. callable bond should be priced the sa%e as. a con'ertible bond.!. a strai+ht bond plus a put option.C. a strai+ht bond plus a call option.

#. a strai+ht bond plus &arrants.$. a strai+ht bond.

2. sian options differ fro% %erican and $uropean options in that. they are only sold in sian financial %arkets.!. they ne'er e"pire.C. their payoff is based on the a'era+e price of the underlyin+ asset.#. they are only sold in sian financial %arkets and they ne'er e"pire.$. they are only sold in sian financial %arkets and their payoff is based on the a'era+e price

of the underlyin+ asset.

(. Tradin+ in Fe"otic optionsF takes place pri%arily. on the /e& ;ork 5tock $"chan+e.!. in the o'er-the-counter %arket.C. on the %erican 5tock $"chan+e.#. in the pri%ary %arketplace.$. /one of these is correct.

). Consider a one-year %aturity call option and a one-year put option on the sa%e stock both &ith strikin+ price 4)*. If the risk-free rate is )G the stock price is 4) and the put sellsfor 41.*0 &hat should be the price of the call=. 4).(!. 4*.,0C. 4,.2(#. 412.2,$. /one of these is correct.

20-2)




*. Consider a one-year %aturity call option and a one-year put option on the sa%e stock both &ith strikin+ price 4100. If the risk-free rate is *G the stock price is 410( and the putsells for 4.*0 &hat should be the price of the call=. 41.*0

!. 41*.2,C. 410.(,#. 412.2,$. /one of these is correct.

,. #eri'ati'e securities are also called contin+ent clai%s because. their o&ners %ay choose &hether or not to e"ercise the%.!. a lar+e contin+ent of in'estors holds the%.C. the &riters %ay choose &hether or not to e"ercise the%.

#. their payoffs depend on the prices of other assets.$. contin+ency %ana+e%ent is used in addin+ the% to portfolios.

. ;ou purchased a call option for 4(.)* se'enteen days a+o. The call has a strike price of4)* and the stock is no& tradin+ for 4*1. If you e"ercise the call today &hat &ill be yourholdin+ period return= If you do not e"ercise the call today and it e"pires &hat &ill be yourholdin+ period return=

. 1(.G?−100G

!. (.G?−100G

C. *.*G?−

1(.G

#. (.G?−*.*G

$. 100G?−100G

. n option &ith an e"ercise price equal to the underlyin+ asset9s price is. &orthless.!. in the %oney.C. at the %oney.

#. out of the %oney.$. theoretically i%possible.

20-2*




. To the option holder put options are &orth >>>>>> &hen the e"ercise price is hi+her? calloptions are &orth >>>>>> &hen the e"ercise price is hi+her.. %ore? %ore!. %ore? less

C. less? %ore#. less? less$. It doesn9t %atterthey are too risky to be included in a reasonable person9s portfolio.

100. Dhat happens to an option if the underlyin+ stock has a 2-for-1 split=. There is no chan+e in either the e"ercise price or in the nu%ber of options held.!. The e"ercise price &ill adust throu+h nor%al %arket %o'e%ents? the nu%ber of options&ill re%ain the sa%e.C. The e"ercise price &ould beco%e half of &hat it &as and the nu%ber of options held &ould

double.#. The e"ercise price &ould double and the nu%ber of options held &ould double.$. There is no standard ruleeach corporation has its o&n policy.

101. Dhat happens to an option if the underlyin+ stock has a (-for-1 split=. There is no chan+e in either the e"ercise price or in the nu%ber of options held.!. The e"ercise price &ill adust throu+h nor%al %arket %o'e%ents? the nu%ber of options&ill re%ain the sa%e.C. The e"ercise price &ould beco%e one third of &hat it &as and the nu%ber of options held

&ould triple.#. The e"ercise price &ould triple and the nu%ber of options held &ould triple.$. There is no standard ruleeach corporation has its o&n policy.

102. 5uppose that you purchased a call option on the 537 100 inde". The option has ane"ercise price of ,0 and the inde" is no& at 20. Dhat &ill happen &hen you e"ercise theoption=. ;ou &ill ha'e to pay 4,0.!. ;ou &ill recei'e 420.

C. ;ou &ill recei'e 4,0.#. ;ou &ill recei'e 4)000.$. ;ou &ill ha'e to pay 4)000.

20-2,




10(. 5uppose that you purchased a call option on the 537 100 inde". The option has ane"ercise price of 00 and the inde" is no& at ,0. Dhat &ill happen &hen you e"ercise theoption=. ;ou &ill ha'e to pay 4,000.

!. ;ou &ill recei'e 4,000.C. ;ou &ill recei'e 400.#. ;ou &ill recei'e 4,0.$. ;ou &ill ha'e to pay 4000.

Short Answer Questions

10). Dhat is the Option Clearin+ Corporation OCCJ and ho& does this or+aniation facilitate

option tradin+=

10*. #escribe the protecti'e put. Dhat are the ad'anta+es of such a strate+y=

10,. #iscuss the differences in &ritin+ co'ered and naked calls. re risks in'ol'ed in the t&ostrate+ies si%ilar or different= $"plain.

20-2




10. #ra& a +raph that sho&s the payoff and profit to the holder of a call option at e"piration.#ra& another +raph that sho&s the payoff to the holder of a put option at e"piration. #ra& athird +raph that sho&s the payoff of a lon+ straddle at e"piration. !e sure to label the a"es andall other rele'ant features of the +raphs.

10. 8ist three types of e"otic options and describe their characteristics.

20-2




Chapter 20 Options Markets: Introduction ns&er Key

Multiple Choice Questions

1. The price that the buyer of a call option pays to acquire the option is called the. strike price!. e"ercise priceC. e"ecution price#. acquisition priceE. pre%iu%

The price that the buyer of a call option pays to acquire the option is called the pre%iu%.

AACSB: Analytic Bloom's: Remember

Difficulty: Basic

Topic: Options

2. The price that the &riter of a call option recei'es to sell the option is called the. strike price!. e"ercise price

C. e"ecution price#. acquisition priceE. pre%iu%

The price that the &riter of a call option recei'es to sell the option is called the pre%iu%.

AACSB: Analytic

Bloom's: Remember

Difficulty: BasicTopic: Options

20-2




(. The price that the buyer of a put option pays to acquire the option is called the. strike price!. e"ercise priceC. e"ecution price

#. acquisition priceE. pre%iu%

The price that the buyer of a put option pays to acquire the option is called the pre%iu%.


Difficulty: Basic

Topic: Options

). The price that the &riter of a put option recei'es to sell the option is called theA. pre%iu%!. e"ercise priceC. e"ecution price#. acquisition price$. strike price

The price that the &riter of a put option recei'es to sell the option is called the pre%iu%.

AACSB: Analytic

Bloom's: Remember


20-(0




*. The price that the buyer of a call option pays for the underlyin+ asset if she e"ecutes heroption is called the. strike price!. e"ercise price

C. e"ecution price#. strike price or e"ecution priceE. strike price or e"ercise price

The price that the buyer of a call option pays for the underlyin+ asset if she e"ecutes heroption is strike price or e"ercise price.

AACSB: Analytic

Bloom's: Remember


,. The price that the &riter of a call option recei'es for the underlyin+ asset if the buyere"ecutes her option is called the. strike price!. e"ercise priceC. e"ecution priceD. strike price or e"ercise price$. strike price or e"ecution price

The price that the &riter of a call option recei'es for the underlyin+ asset if the buyer e"ecutes

her option is called the strike price or e"ercise price.

AACSB: Analytic

Bloom's: Remember Difficulty: Basic

Topic: Options

20-(1




. The price that the buyer of a put option recei'es for the underlyin+ asset if she e"ecutes heroption is called the. strike price!. e"ercise price

C. e"ecution price#. strike price or e"ecution priceE. strike price or e"ercise price

The price that the buyer of a put option recei'es for the underlyin+ asset if she e"ecutes heroption is called the strike price or e"ercise price.

AACSB: Analytic

Bloom's: Remember


. The price that the &riter of a put option recei'es for the underlyin+ asset if the option ise"ercised is called the. strike price!. e"ercise priceC. e"ecution price#. strike price or e"ercise priceE. /one of these is correct

The price that the &riter of a put option recei'es for the underlyin+ asset if the option is

e"ercised depends on the %arket price at the ti%e.

AACSB: Analytic


Topic: Options

20-(2




. n %erican call option allo&s the buyer to. sell the underlyin+ asset at the e"ercise price on or before the e"piration date.!. buy the underlyin+ asset at the e"ercise price on or before the e"piration date.C. sell the option in the open %arket prior to e"piration.

#. sell the underlyin+ asset at the e"ercise price on or before the e"piration date and sell theoption in the open %arket prior to e"piration.E. buy the underlyin+ asset at the e"ercise price on or before the e"piration date and sell theoption in the open %arket prior to e"piration.

n %erican call option %ay be e"ercised allo&in+ the holder to buy the underlyin+ assetJon or before e"piration? the option contract also %ay be sold prior to e"piration.



10. $uropean call option allo&s the buyer to. sell the underlyin+ asset at the e"ercise price on the e"piration date.!. buy the underlyin+ asset at the e"ercise price on or before the e"piration date.C. sell the option in the open %arket prior to e"piration.#. buy the underlyin+ asset at the e"ercise price on the e"piration date.E. sell the option in the open %arket prior to e"piration and buy the underlyin+ asset at thee"ercise price on the e"piration date.

$uropean call option %ay be e"ercised allo&in+ the holder to buy the underlyin+ assetJ onthe e"piration date? the option contract also %ay be sold prior to e"piration.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-((




11. n %erican put option allo&s the holder to. buy the underlyin+ asset at the strikin+ price on or before the e"piration date.. sell the underlyin+ asset at the strikin+ price on or before the e"piration date.C. potentially benefit fro% a stock price increase.

#. sell the underlyin+ asset at the strikin+ price on or before the e"piration date and potentially benefit fro% a stock price increase.$. buy the underlyin+ asset at the strikin+ price on or before the e"piration date and potentially benefit fro% a stock price increase.

n %erican put option allo&s the buyer to sell the underlyin+ asset at the strikin+ price on or before the e"piration date.



12. $uropean put option allo&s the holder to. buy the underlyin+ asset at the strikin+ price on or before the e"piration date.!. sell the underlyin+ asset at the strikin+ price on or before the e"piration date.C. potentially benefit fro% a stock price increase.D. sell the underlyin+ asset at the strikin+ price on the e"piration date.$. potentially benefit fro% a stock price increase and sell the underlyin+ asset at the strikin+ price on the e"piration date.

$uropean put option allo&s the buyer to sell the underlyin+ asset at the strikin+ price onlyon the e"piration date. The put option also allo&s the in'estor to benefit fro% an e"pectedstock price decrease &hile riskin+ only the a%ount in'ested in the contract.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-()




1(. n %erican put option can be e"ercisedA. any ti%e on or before the e"piration date.!. only on the e"piration date.C. any ti%e in the indefinite future.

#. only after di'idends are paid.$. /one of these is correct.

%erican options can be e"ercised on or before e"piration date.


Difficulty: Basic

Topic: Options

1). n %erican call option can be e"ercisedA. any ti%e on or before the e"piration date.!. only on the e"piration date.C. any ti%e in the indefinite future.#. only after di'idends are paid.$. /one of these is correct.

%erican options can be e"ercised on or before e"piration date.

AACSB: Analytic

Bloom's: Remember


1*. $uropean call option can be e"ercised. any ti%e in the future.. only on the e"piration date.C. if the price of the underlyin+ asset declines belo& the e"ercise price.#. i%%ediately after di'idends are paid.$. /one of these is correct.

$uropean options can be e"ercised at e"piration only.

AACSB: Analytic

Bloom's: Remember


20-(*




1,. $uropean put option can be e"ercised. any ti%e in the future.. only on the e"piration date.C. if the price of the underlyin+ asset declines belo& the e"ercise price.

#. i%%ediately after di'idends are paid.$. /one of these is correct.

$uropean options can be e"ercised at e"piration only.


Difficulty: Basic

Topic: Options

1. To adust for stock splitsA. the e"ercise price of the option is reduced by the factor of the split and the nu%ber ofoptions held is increased by that factor.!. the e"ercise price of the option is increased by the factor of the split and the nu%ber ofoptions held is reduced by that factor.C. the e"ercise price of the option is reduced by the factor of the split and the nu%ber ofoptions held is reduced by that factor.#. the e"ercise price of the option is increased by the factor of the split and the nu%ber ofoptions held is increased by that factor.$. /one of these is correct

To adust for stock splits the e"ercise price of the option is reduced by the factor of the splitand the nu%ber of options held is increased by that factor.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-(,




1. ll else equal call option 'alues are lo&er. in the %onth of May.!. for lo& di'idend payout policies.C. for hi+h di'idend payout policies.

#. in the %onth of May and for lo& di'idend payout policies.$. in the %onth of May and for hi+h di'idend payout policies.

ll else equal call option 'alues are lo&er for hi+h di'idend payout policies.


Difficulty: Basic

Topic: Options

1. ll else equal call option 'alues are hi+her. in the %onth of May.. for lo& di'idend payout policies.C. for hi+h di'idend payout policies.#. in the %onth of May and for lo& di'idend payout policies.$. in the %onth of May and for hi+h di'idend payout policies.

ll else equal call option 'alues are hi+her for lo& di'idend payout policies.

AACSB: Analytic

Bloom's: Remember


20-(




20. The current %arket price of a share of T3T stock is 4*0. If a call option on this stock hasa strike price of 4)* the call. is out of the %oney.!. is in the %oney.

C. sells for a hi+her price than if the %arket price of T3T stock is 4)0.#. is out of the %oney and sells for a hi+her price than if the %arket price of T3T stock is4)0.E. is in the %oney and sells for a hi+her price than if the %arket price of T3T stock is 4)0.

If the strikin+ price on a call option is less than the %arket price the option is in the %oneyand sells for %ore than an out of the %oney option.

AACSB: Analytic Bloom's: Understand


21. The current %arket price of a share of !oein+ stock is 4*. If a call option on this stockhas a strike price of 40 the call. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the %arket price of !oein+ stock is 40.#. is out of the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is40.E. is in the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is 40.

If the strikin+ price on a call option is less than the %arket price the option is in the %oneyand sells for %ore than an at the %oney option.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-(




22. The current %arket price of a share of C5CO stock is 422. If a call option on this stock hasa strike price of 420 the call. is out of the %oney.!. is in the %oney.

C. sells for a hi+her price than if the %arket price of C5CO stock is 421.#. is out of the %oney and sells for a hi+her price than if the %arket price of C5CO stock is421.E. is in the %oney and sells for a hi+her price than if the %arket price of C5CO stock is 421.

If the strikin+ price on a call option is less than the %arket price the option is in the %oneyand sells for %ore than a less in the %oney option.



2(. The current %arket price of a share of #isney stock is 4(0. If a call option on this stockhas a strike price of 4(* the callA. is out of the %oney.!. is in the %oney.C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.$. is in the %oney and can be e"ercised profitably.

If the strikin+ price on a call option is %ore than the %arket price the option is out of the%oney and cannot be e"ercised profitably.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-(




2). The current %arket price of a share of CT stock is 4,. If a call option on this stock has astrike price of 4, the call. is out of the %oney.!. is in the %oney.


If the strikin+ price on a call option is equal to the %arket price the option is at the %oney.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

2*. The current %arket price of a share of MOT stock is 42). If a call option on this stock hasa strike price of 42) the call. is out of the %oney.!. is in the %oney.C. is at the %oney.#. is out of the %oney and is at the %oney.$. is in the %oney and is at the %oney.


AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)0




2,. The current %arket price of a share of I!M stock is 40. If a call option on this stock has astrike price of 40 the call. is out of the %oney.!. is in the %oney.



AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

2. put option on a stock is said to be out of the %oney if. the e"ercise price is hi+her than the stock price.. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

n out of the %oney put option +i'es the o&ner the ri+ht to sell the shares for less than%arket price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)1




2. put option on a stock is said to be in the %oney ifA. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.


n in the %oney put option +i'es the o&ner the ri+ht to sell the shares for %ore than %arket price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

2. put option on a stock is said to be at the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

put option on a stock is said to be at the %oney if the e"ercise price is equal to the stock price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)2




(0. call option on a stock is said to be out of the %oney ifA. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.


n out of the %oney call option +i'es the o&ner the ri+ht to buy the shares for %ore than%arket price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

(1. call option on a stock is said to be in the %oney if. the e"ercise price is hi+her than the stock price.. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.#. the price of the put is hi+her than the price of the call.$. the price of the call is hi+her than the price of the put.

n in the %oney call option +i'es the o&ner the ri+ht to buy the shares for less than %arket price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)(




(2. call option on a stock is said to be at the %oney if. the e"ercise price is hi+her than the stock price.!. the e"ercise price is less than the stock price.C. the e"ercise price is equal to the stock price.


call option on a stock is said to be at the %oney if the e"ercise price is equal to the stock price.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

((. The current %arket price of a share of 6/6 stock is 4,0. If a put option on this stock has astrike price of 4** the put. is in the %oney.!. is out of the %oney.C. sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.#. is in the %oney and sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.E. is out of the %oney and sells for a lo&er price than if the %arket price of 6/6 stock is 4*0.

If the strikin+ price on a put option is less than the %arket price the option is out of the%oney and sells for less than an in the %oney option.

AACSB: Analytic

Bloom's: Understand


20-))




(). The current %arket price of a share of a stock is 40. If a put option on this stock has astrike price of 4* the put. is in the %oney.!. is out of the %oney.

C. sells for a lo&er price than if the %arket price of the stock is 4*.#. is in the %oney and sells for a lo&er price than if the %arket price of the stock is 4*.E. is out of the %oney and sells for a lo&er price than if the %arket price of the stock is 4*.

If the strikin+ price on a put option is less than the %arket price the option is out of the%oney and sells for less than an at the %oney option.

AACSB: Analytic

Bloom's: Understand


(*. The current %arket price of a share of a stock is 420. If a put option on this stock has astrike price of 41 the putA. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the strike price of the put option &as 42(.#. is out of the %oney and sells for a hi+her price than if the strike price of the put option &as42(.$. is in the %oney and sells for a hi+her price than if the strike price of the put option &as42(.


AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)*




(,. The current %arket price of a share of MOT stock is 41*. If a put option on this stock hasa strike price of 420 the put. is out of the %oney.!. is in the %oney.

C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.E. is in the %oney and can be e"ercised profitably.

If the strikin+ price on a put option is %ore than the %arket price the option is in the %oney.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

(. The current %arket price of a share of 78M stock is 4*. If a put option on this stock hasa strike price of 4 the put. is out of the %oney.!. is in the %oney.C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.E. is in the %oney and can be e"ercised profitably.

If the strikin+ price on a put option is %ore than the %arket price the option is in the %oneyand can be profitably e"ercised.

AACSB: Analytic

Bloom's: Understand


20-),




(. The current %arket price of a share of T3T stock is 4*0. If a put option on this stock hasa strike price of 4)* the put. is out of the %oney.!. is in the %oney.

C. sells for a lo&er price than if the %arket price of T3T stock is 4)0.D. is out of the %oney and sells for a lo&er price than if the %arket price of T3T stock is4)0.$. is in the %oney and sells for a lo&er price than if the %arket price of T3T stock is 4)0.




(. The current %arket price of a share of !oein+ stock is 4*. If a put option on this stockhas a strike price of 40 the putA. is out of the %oney.!. is in the %oney.C. sells for a hi+her price than if the %arket price of !oein+ stock is 40.#. is out of the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is40.$. is in the %oney and sells for a hi+her price than if the %arket price of !oein+ stock is 40.

If the strikin+ price on a put option is less than the %arket price the option is out of the%oney and sells for less than an at the %oney option.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)




)0. The current %arket price of a share of C5CO stock is 422. If a put option on this stock hasa strike price of 420 the putA. is out of the %oney.!. is in the %oney.

C. sells for a hi+her price than if the strike price of the put option &as 42*.#. is out of the %oney and sells for a hi+her price than if the strike price of the put option &as42*.$. is in the %oney and sells for a hi+her price than if the strike price of the put option &as42*.


AACSB: Analytic

Bloom's: Understand Difficulty: Basic

Topic: Options

)1. The current %arket price of a share of #isney stock is 4(0. If a put option on this stockhas a strike price of 4(* the put. is out of the %oney.!. is in the %oney.C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.E. is in the %oney and can be e"ercised profitably.

If the strikin+ price on a put option is %ore than the %arket price the option is in the %oneyand can be e"ercise profitably.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Options

20-)




)2. The current %arket price of a share of CT stock is 4,. If a put option on this stock has astrike price of 40 the put. is out of the %oney.!. is in the %oney.

C. can be e"ercised profitably.#. is out of the %oney and can be e"ercised profitably.E. is in the %oney and can be e"ercised profitably.

If the strikin+ price on a put option is less than the %arket price the option is in the %oneyand can be profitably e"ercised.

AACSB: Analytic

Bloom's: Understand


)(. 8ookback options ha'e payoffs thatA. depend in part on the %ini%u% or %a"i%u% price of the underlyin+ asset durin+ the life of the option.!. only depend on the %ini%u% price of the underlyin+ asset durin+ the life of the option.C. only depend on the %a"i%u% price of the underlyin+ asset durin+ the life of the option.#. are kno&n in ad'ance.$. /one of these is correct.

8ookback options ha'e payoffs that ha'e payoffs that depend in part on the %ini%u% or

%a"i%u% price of the underlyin+ asset durin+ the life of the option.

AACSB: Analytic


Topic: Options

20-)




)). !arrier Options ha'e payoffs that. ha'e payoffs that only depend on the %ini%u% price of the underlyin+ asset durin+ the lifeof the option.. depend both on the asset9s price at e"piration and on &hether the underlyin+ asset9s price

has crossed throu+h so%e barrier.C. are kno&n in ad'ance.#. ha'e payoffs that only depend on the %a"i%u% price of the underlyin+ asset durin+ the lifeof the option.$. /one of these is correct.

!arrier Options ha'e payoffs that depend both on the asset9s price at e"piration and on&hether the underlyin+ asset9s price has crossed throu+h so%e barrier.

AACSB: Analytic


Topic: Options

)*. Currency-Translated Options ha'e. only asset prices denoted in a forei+n currency.!. only e"ercise prices denoted in a forei+n currency.C. ha'e payoffs that only depend on the %a"i%u% price of the underlyin+ asset durin+ the lifeof the option.D. either asset or e"ercise prices denoted in a forei+n currency.$. /one of these is correct.

Currency-Translated Options ha'e either asset or e"ercise prices denoted in a forei+ncurrency.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-*0




),. !inary Options. are based on t&o possible outco%esyes or no.!. %ay %ake a payoff of a fi"ed a%ount if a specified e'ent happens.C. %ay %ake a payoff of a fi"ed a%ount if a specified e'ent does not happen.

#. are based on t&o possible outco%esyes or no and %ay %ake a payoff of a fi"ed a%ountif a specified e'ent happens.E. Options are based on t&o possible outco%esyes or no %ay %ake a payoff of a fi"eda%ount if a specified e'ent happens and %ay %ake a payoff of a fi"ed a%ount if a specifiede'ent does not happen.

!inary Options are based on t&o possible outco%esyes or no %ay %ake a payoff of a fi"eda%ount if a specified e'ent happens and %ay %ake a payoff of a fi"ed a%ount if a specifiede'ent does not happen.

AACSB: Analytic

Bloom's: Remember


). The %a"i%u% loss a buyer of a stock call option can suffer is equal to. the strikin+ price %inus the stock price.!. the stock price %inus the 'alue of the call.C. the call pre%iu%.#. the stock price.$. /one of these is correct.

If an option e"pires &orthless all the buyer has lost is the price of the contract pre%iu%J.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-*1




). The %a"i%u% loss a buyer of a stock put option can suffer is equal to. the strikin+ price %inus the stock price.!. the stock price %inus the 'alue of the call.C. the put pre%iu%.

#. the stock price.$. /one of these is correct.

If an option e"pires &orthless all the buyer has lost is the price of the contract pre%iu%J.


Difficulty: Basic

Topic: Options

). The lo&er bound on the %arket price of a con'ertible bond is. its strai+ht bond 'alue.!. its crooked bond 'alue.C. its con'ersion 'alue.D. its strai+ht bond 'alue and its con'ersion 'alue.$. /one of these is correct

The lo&er bound on the %arket price of a con'ertible bond is its strai+ht bond 'alue or itscon'ersion 'alue.


Difficulty: Basic

Topic: Options

20-*2




*0. The potential loss for a &riter of a naked call option on a stock is. li%ited.. unli%ited.C. lar+er the lo&er the stock price.

#. equal to the call pre%iu%.$. /one of these is correct.

If the buyer of the option elects to e"ercise the option and buy the stock at the e"ercise pricethe seller of the option %ust +o into the open %arket and buy the stock in order to sell thestock to the buyer of the contractJ at the current %arket price. Theoretically the %arket priceof a stock is unli%ited? thus the &riter9s potential loss is unli%ited.


Difficulty: IntermediateTopic: Options

*1. ;ou &rite one 6/6 <ebruary 0 put for a pre%iu% of 4*. I+norin+ transactions costs &hatis the breake'en price of this position=A. 4,*!. 4*C. 4*#. 40$. /one of these is correct

L40−

4* 4,*.

AACSB: Analytic

Bloom's: Apply

Difficulty: Basic

Topic: Options

20-*(




*2. ;ou purchase one 6/6 * call option for a pre%iu% of 4(. I+norin+ transaction costs the break-e'en price of the position is. 4*!. 42

C. 4(D. 4$. /one of these is correct

L* L 4( 4.

AACSB: Analytic

Bloom's: Apply

Difficulty: Basic

Topic: Options

*(. ;ou &rite one T3T <ebruary *0 put for a pre%iu% of 4*. I+norin+ transactions costs&hat is the breake'en price of this position=. 4*0!. 4**C. 4)*#. 4)0$. /one of these is correct

L4*0−4* 4)*.

AACSB: Analytic

Bloom's: Apply


20-*)




*). ;ou purchase one I!M 0 call option for a pre%iu% of 4,. I+norin+ transaction costs the break-e'en price of the position is. 4!. 4,)

C. 4,#. 40$. /one of these is correct

L0 L 4, 4,.

AACSB: Analytic

Bloom's: Apply

Difficulty: Basic

Topic: Options

**. Call options on I!M listed stock options are. issued by I!M Corporation.!. created by in'estors.C. traded on 'arious e"chan+es.#. issued by I!M Corporation and traded on 'arious e"chan+es.E. created by in'estors and traded on 'arious e"chan+es.

Options are %erely contracts bet&een buyer and seller and sold on 'arious or+aniede"chan+es and the OTC %arket.

AACSB: Analytic

Bloom's: Remember

Difficulty: Intermediate

Topic: Options

20-**




*,. !uyers of call options >>>>>>>>>> required to post %ar+in deposits and sellers of putoptions >>>>>>>>>> required to post %ar+in deposits.. are? are not!. are? are

C. are not? are#. are not? are not$. are al&ays? are so%eti%es

!uyers of call options pose no risk as they ha'e no co%%it%ent. If the option e"pires&orthless the buyer %erely loses the option pre%iu%. If the option is in the %oney ate"piration and the buyer lacks funds there is no require%ent to e"ercise. The seller of a putoption is co%%itted to sellin+ the stock at the e"ercise price. If the seller of the option doesnot o&n the underlyin+ stock the seller %ust +o into the open %arket and buy the stock inorder to be able to sell the stock to the buyer of the contract.

AACSB: Analytic

Bloom's: Remember Difficulty: Intermediate

Topic: Options

*. !uyers of put options anticipate the 'alue of the underlyin+ asset &ill >>>>>>>>>> andsellers of call options anticipate the 'alue of the underlyin+ asset &ill >>>>>>>.. increase? increase!. decrease? increaseC. increase? decrease

D. decrease? decrease$. cannot tell &ithout further infor%ation

The buyer of the put option hopes the price &ill fall in order to e"ercise the option and sell thestock at a price hi+her than the %arket price. 8ike&ise the seller of the call option hopes the price &ill decrease so the option &ill e"pire &orthless.

AACSB: Analytic

Bloom's: Remember


Topic: Options

20-*,




*. The Option Clearin+ Corporation is o&ned by. the <ederal @eser'e 5yste%.. the e"chan+es on &hich stock options are traded.C. the %aor A. 5. banks.

#. the <ederal #eposit Insurance Corporation.$. /one of these is correct.

The e"chan+es on &hich options are traded ointly o&n the Option Clearin+ Corporation inorder to facilitate option tradin+.

AACSB: Analytic

Bloom's: Remember


Topic: Options

*. co'ered call position is. the si%ultaneous purchase of the call and the underlyin+ asset.!. the purchase of a share of stock &ith a si%ultaneous sale of a put on that stock.C. the short sale of a share of stock &ith a si%ultaneous sale of a call on that stock.D. the purchase of a share of stock &ith a si%ultaneous sale of a call on that stock.$. the si%ultaneous purchase of a call and sale of a put on the sa%e stock.

Dritin+ a co'ered call is a 'ery safe strate+y as the &riter o&ns the underlyin+ stock. Theonly risk to the &riter is that the stock &ill be called a&ay thus li%itin+ the upside potential.

AACSB: Analytic

Bloom's: Remember


Topic: Options

20-*




,0. ccordin+ to the put-call parity theore% the 'alue of a $uropean put option on a non-di'idend payin+ stock is equal to:. the call 'alue plus the present 'alue of the e"ercise price plus the stock price.. the call 'alue plus the present 'alue of the e"ercise price %inus the stock price.

C. the present 'alue of the stock price %inus the e"ercise price %inus the call price.#. the present 'alue of the stock price plus the e"ercise price %inus the call price.$. /one of these is correct.

7 C−5O L 7NEJ L 7Ndi'idendsJ &here 5O the %arket price of the stock and E the

e"ercise price.


Difficulty: Challene

Topic: Options

,1. protecti'e put strate+y isA. a lon+ put plus a lon+ position in the underlyin+ asset.!. a lon+ put plus a lon+ call on the sa%e underlyin+ asset.C. a lon+ call plus a short put on the sa%e underlyin+ asset.#. a lon+ put plus a short call on the sa%e underlyin+ asset.$. /one of these is correct.

If you in'est in a stock and purchase a put option on the stock you are +uaranteed a payoffequal to the e"ercise price? thus the protection of the put.



Topic: Options

20-*




,2. 5uppose the price of a share of Boo+le stock is 4*00. n pril call option on Boo+lestock has a pre%iu% of 4* and an e"ercise price of 4*00. I+norin+ co%%issions the holder of the call option &ill earn a profit if the price of the share. increases to 4*0).

!. decreases to 4)0.C. increases to 4*0,.#. decreases to 4),.$. /one of these is correct.

4*00 L 4* 4*0* !reake'enJ. The price of the stock %ust increase to abo'e 4*0* for theoption holder to earn a profit.

AACSB: Analytic Bloom's: Apply


,(. 5uppose the price of a share of I!M stock is 4100. n pril call option on I!M stock hasa pre%iu% of 4* and an e"ercise price of 4100. I+norin+ co%%issions the holder of the calloption &ill earn a profit if the price of the share. increases to 410).!. decreases to 40.C. increases to 410,.#. decreases to 4,.$. /one of these is correct.

4100 L 4* 410* !reake'enJ. The price of the stock %ust increase to abo'e 410* for theoption holder to earn a profit.

AACSB: Analytic

Bloom's: Apply


Topic: Options

20-*




,). ;ou purchased one T3T March *0 call and sold one T3T March ** call. ;our strate+yis kno&n as. a lon+ straddle.!. a horiontal spread.

C. a %oney spread.#. a short straddle.$. /one of these is correct.

%oney spread in'ol'es the purchase one option and the si%ultaneous sale of another &ith adifferent e"ercise price and sa%e e"piration date.

AACSB: Analytic

Bloom's: Remember


,*. ;ou purchased one T3T March *0 put and sold one T3T pril *0 put. ;our strate+y iskno&n as. a 'ertical spread.!. a straddle.C. a ti%e spread.#. a collar.$. /one of these is correct.

ti%e spread in'ol'es the si%ultaneous purchase and sale of options &ith different e"piration

dates sa%e e"ercise price.

AACSB: Analytic

Bloom's: Remember Difficulty: Intermediate

Topic: Options

20-,0




,,. !efore e"piration the ti%e 'alue of a call option is equal to. ero.. the actual call price %inus the intrinsic 'alue of the call.C. the intrinsic 'alue of the call.

#. the actual call price plus the intrinsic 'alue of the call.$. /one of these is correct.

The difference bet&een the actual call price and the intrinsic 'alue is the ti%e 'alue of theoption &hich should not be confused &ith the ti%e 'alue of %oney. The option9s ti%e 'alue isthe difference bet&een the option9s price and the 'alue of the option &ere the option e"pirin+i%%ediately.



,. Dhich of the follo&in+ factors affect the price of a stock option. the risk-free rate.!. the riskiness of the stock.C. the ti%e to e"piration.#. the e"pected rate of return on the stock.E. the risk-free rate the riskiness of the stock and the ti%e to e"piration.

The risk-free rate the riskiness of the stock and the ti%e to e"piration are directly related to

the price of the option? the e"pected rate of return on the stock does not affect the price of theoption.

AACSB: Analytic

Bloom's: Remember


Topic: Options

20-,1




,. ll of the follo&in+ factors affect the price of a stock option except . the risk-free rate.!. the riskiness of the stock.C. the ti%e to e"piration.

D. the e"pected rate of return on the stock.$. /one of these is correct.

The risk-free rate the riskiness of the stock and the ti%e to e"piration are directly related tothe price of the option? the e"pected rate of return on the stock does not affect the price of theoption.

AACSB: Analytic

Bloom's: Remember


,. The 'alue of a stock put option is positi'ely related to the follo&in+ factors except . the ti%e to e"piration.!. the strikin+ price.C. the stock price.#. ll of these are correct.$. /one of these is correct.

The ti%e to e"piration and strikin+ price are positi'ely related to the 'alue of a put option? thestock price is in'ersely related to the 'alue of the option.

AACSB: Analytic

Bloom's: Remember


20-,2




0. The 'alue of a stock put option is positi'ely related to. the ti%e to e"piration.!. the strikin+ price.C. the stock price.

#. all listed ans&ers.E. the ti%e to e"piration and the strikin+ price.

The ti%e to e"piration and strikin+ price are positi'ely related to the 'alue of a put option? thestock price is in'ersely related to the 'alue of the option.

AACSB: Analytic

Bloom's: Remember


Topic: Options

1. ;ou purchase one 5epte%ber *0 put contract for a put pre%iu% of 42. Dhat is the%a"i%u% profit that you could +ain fro% this strate+y=A. 4)00!. 4200C. 4*000#. 4*200$. /one of these is correct

−4200 L 4*000 4)00 if the stock falls to ero.J

AACSB: Analytic

Bloom's: Apply


20-,(




2. ;ou purchase one 6une 0 put contract for a put pre%iu% of 4). Dhat is the %a"i%u% profit that you could +ain fro% this strate+y=. 4000!. 4)00

C. 4)00D. 4,,00$. /one of these is correct

−4)00 L 4000 4,,00 if the stock falls to ero.J

AACSB: Analytic

Bloom's: Apply Difficulty: Intermediate

Topic: Options

(. ;ou purchase one I!M March 100 put contract for a put pre%iu% of 4,. Dhat is the%a"i%u% profit that you could +ain fro% this strate+y=. 410000!. 410,00C. 4)00#. 4000$. /one of these is correct

−4,00 L 410000 4)00 if the stock falls to ero.J



Topic: Options

20-,)




). The follo&in+ price quotations &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one <ebruary 0 call contract is. 4(.12*0!. 4(1.00C. 4(12.*0#. 4*.00$. /one of these is correct

( 1 4(.12* E 100 4(12.*0. 7rice quotations are per share? ho&e'er option contracts arestandardied for 100 shares of the underlyin+ stock? thus the quoted pre%iu%s %ust be

%ultiplied by 100.

AACSB: Analytic

Bloom's: Apply Difficulty: Intermediate

Topic: Options

20-,*




*. The follo&in+ price quotations on I!M &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one I!M <ebruary 0 call contract is. 4).12*0!. 4)1.00C. 4)12.*0#. 41*.00$. /one of these is correct

) 1 4).12* E 100 4)12.*0. 7rice quotations are per share? ho&e'er option contracts arestandardied for 100 shares of the underlyin+ stock? thus the quoted pre%iu%s %ust be

%ultiplied by 100.

AACSB: Analytic

Bloom's: Apply


Topic: Options

,. The follo&in+ price quotations on I!M &ere taken fro% the Dall 5treet 6ournal.

The pre%iu% on one I!M <ebruary * call contract is. 4.*. 4.*0C. 4)12.*0#. 41*.00$. /one of these is correct

4.* E 100 4.*0. 7rice quotations are per share? ho&e'er option contracts arestandardied for 100 shares of the underlyin+ stock? thus the quoted pre%iu%s %ust be%ultiplied by 100.

AACSB: Analytic

Bloom's: Apply


20-,,




5uppose you purchase one I!M May 100 call contract at 4* and &rite one I!M May 10* callcontract at 42.

. The %a"i%u% potential profit of your strate+y is >>>>>>>> if both options are e"ercised.. 4,00.!. 4*00.C. 4200.#. 4(00.$. 4100

−4100−4* −410*? L 42 L 410* 410? 42 P 100 4200.

AACSB: Analytic

Bloom's: Apply


Topic: Options

. If at e"piration the price of a share of I!M stock is 410( your profit &ould be. 4*00.!. 4(00.C. ero.#. 4200.$. /one of these is correct.

410(−4100 4(−4*−42J 0? 40 P 100 40.

AACSB: Analytic

Bloom's: Apply


Topic: Options

20-,




. The %a"i%u% loss you could suffer fro% your strate+y is. 4200.. 4(00.C. ero.

#. 4*00.$. /one of these is correct.

−4* L 42 −4( P 100 −4(00.

AACSB: Analytic

Bloom's: Apply


Topic: Options

0. Dhat is the lo&est stock price at &hich you can break e'en=. 4101.!. 4102.C. 410(.#. 410).$. /one of these is correct.

" 4100 L 4*−42? " 410(.



Topic: Options

;ou buy one Eero" 6une ,0 call contract and one 6une ,0 put contract. The call pre%iu% is4* and the put pre%iu% is 4(.

20-,




1. ;our strate+y is called. a short straddle.. a lon+ straddle.C. a horiontal straddle.

#. a co'ered call.$. /one of these is correct.

!uyin+ both a put and a call each &ith the sa%e e"piration date and e"ercise price is a lon+straddle.

AACSB: Analytic

Bloom's: Remember


Topic: Options

2. ;our %a"i%u% loss fro% this position could be. 4*00.!. 4(00.C. 400.#. 4200.$. /one of these is correct.

−4* L −4(J −4 P 100 400.

AACSB: Analytic

Bloom's: Apply


Topic: Options

20-,




(. t e"piration you break e'en if the stock price is equal to. 4*2.!. 4,0.C. 4,.

D. 4*2 and 4,.$. /one of these is correct.

Call:−4,0 L −4*J L 4( 4, !reak e'enJ? 7ut:−4( L 4,0 L −4*J 4*2 !reak e'enJ?

thus if price increases abo'e 4, or decreases belo& 4*2 a profit is realied.

AACSB: Analytic

Bloom's: Apply Difficulty: Challene

Topic: Options

). The put-call parity theore%. represents the proper relationship bet&een put and call prices.!. allo&s for arbitra+e opportunities if 'iolated.C. %ay be 'iolated by s%all a%ounts but not enou+h to earn arbitra+e profits oncetransaction costs are considered.D. ll of these are correct.$. /one of these is correct.

The put-call parity relationship states the relationship bet&een put and call prices &hich if'iolated allo&s for arbitra+e profits? ho&e'er these profits %ay disappear once transactioncosts are considered.

AACSB: Analytic

Bloom's: Remember


Topic: Options

20-0




*. 5o%e %ore FtraditionalF assets ha'e option-like features? so%e of these instru%entsinclude. callable bonds.!. con'ertible bonds.

C. &arrants.#. callable bonds and con'ertible bonds.E. callable bonds con'ertible bonds and &arrants.

ll of the %entioned instru%ents ha'e option-like features.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

,. <inancial en+ineerin+. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the price of the underlyin+ security.!. pri%arily takes place for institutional in'estor.C. pri%arily takes places for the indi'idual in'estor.D. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the price of the underlyin+ security and pri%arily takes place for institutional in'estor.$. is the custo% desi+nin+ of securities or portfolios &ith desired patterns of e"posure to the price of the underlyin+ security and pri%arily takes places for the indi'idual in'estor.

<inancial en+ineerin+ is the custo%iation of ne& securities pri%arily for institutionalin'estors.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-1




. collar &ith a net outlay of appro"i%ately ero is an options strate+y that. co%bines a put and a call to lock in a price ran+e for a security.!. uses the +ains fro% sale of a call to purchase a put.C. uses the +ains fro% sale of a put to purchase a call.

D. co%bines a put and a call to lock in a price ran+e for a security and uses the +ains fro%sale of a call to purchase a put.$. co%bines a put and a call to lock in a price ran+e for a security and uses the +ains fro% saleof a put to purchase a call.

The collar brackets the 'alue of a portfolio bet&een t&o bounds.

AACSB: Analytic

Bloom's: Remember


. Top <li+ht 5tock currently sells for 4*(. one-year call option &ith strike price of 4*sells for 410 and the risk free interest rate is *.*G. Dhat is the price of a one-year put &ithstrike price of 4*=. 410.00!. 412.12C. 41,.00D. 411.$. 41).1(

7 10−

*( L *1.0**J? 7 11.

AACSB: Analytic

Bloom's: Apply


Topic: Options

20-2




. Hi+h<lyer 5tock currently sells for 4). one-year call option &ith strike price of 4**sells for 4 and the risk free interest rate is ,G. Dhat is the price of a one-year put &ith strike price of 4**=. 4.00

. 412.C. 41,.00#. 41.2$. 41*.,0

7 −) L **1.0,J? 7 12.



Topic: Options

0. I/B 5tock currently sells for 4(. one-year call option &ith strike price of 4)* sells for4 and the risk free interest rate is )G. Dhat is the price of a one-year put &ith strike price of 4)*=. 4.00!. 412.C. 41,.00#. 41.2E. 41).2,

7 −( L )*1.0)J? 7 1).2,

AACSB: Analytic

Bloom's: Apply

Difficulty: ChalleneTopic: Options

20-(




1. callable bond should be priced the sa%e as. a con'ertible bond.!. a strai+ht bond plus a put option.C. a strai+ht bond plus a call option.

#. a strai+ht bond plus &arrants.$. a strai+ht bond.

callable bond is the equi'alent of a strai+ht bond sale by the corporation and the concurrentissue of a call option by the bond buyer.

AACSB: Analytic

Bloom's: Apply


Topic: Options

2. sian options differ fro% %erican and $uropean options in that. they are only sold in sian financial %arkets.!. they ne'er e"pire.C. their payoff is based on the a'era+e price of the underlyin+ asset.#. they are only sold in sian financial %arkets and they ne'er e"pire.$. they are only sold in sian financial %arkets and their payoff is based on the a'era+e priceof the underlyin+ asset.

sian options ha'e payoffs that depend on the a'era+e price of the underlyin+ asset durin+so%e period of ti%e.

AACSB: Analytic

Bloom's: Remember


20-)




(. Tradin+ in Fe"otic optionsF takes place pri%arily. on the /e& ;ork 5tock $"chan+e.. in the o'er-the-counter %arket.C. on the %erican 5tock $"chan+e.

#. in the pri%ary %arketplace.$. /one of these is correct.

There is an acti'e o'er-the-counter %arket for e"otic options.



Topic: Options

). Consider a one-year %aturity call option and a one-year put option on the sa%e stock both &ith strikin+ price 4)*. If the risk-free rate is )G the stock price is 4) and the put sellsfor 41.*0 &hat should be the price of the call=. 4).(!. 4*.,0C. 4,.2(#. 412.2,$. /one of these is correct.

C )−Q)*1.0)JR L 1.*0? C 4,.2(.

AACSB: Analytic

Bloom's: Apply


20-*




*. Consider a one-year %aturity call option and a one-year put option on the sa%e stock both &ith strikin+ price 4100. If the risk-free rate is *G the stock price is 410( and the putsells for 4.*0 &hat should be the price of the call=. 41.*0

. 41*.2,C. 410.(,#. 412.2,$. /one of these is correct.

C 10(−Q1001.0*JR L .*0? C 41*.2,.



Topic: Options

,. #eri'ati'e securities are also called contin+ent clai%s because. their o&ners %ay choose &hether or not to e"ercise the%.!. a lar+e contin+ent of in'estors holds the%.C. the &riters %ay choose &hether or not to e"ercise the%.D. their payoffs depend on the prices of other assets.$. contin+ency %ana+e%ent is used in addin+ the% to portfolios.

The 'alues of deri'ati'es depend on the 'alues of the underlyin+ stock co%%odity inde"etc.


Difficulty: Basic

Topic: Options

20-,




. ;ou purchased a call option for 4(.)* se'enteen days a+o. The call has a strike price of4)* and the stock is no& tradin+ for 4*1. If you e"ercise the call today &hat &ill be yourholdin+ period return= If you do not e"ercise the call today and it e"pires &hat &ill be yourholdin+ period return=

. 1(.G -100G. (.G -100GC. *.*G -1(.G#. (.G -*.*G$. 100G -100G

If the call is e"ercised the +ross profit is 4*1−)*4,. The net profit is 4,−(.)*42.**. The

holdin+ period return is 42.**4(.)*.( (.GJ. If the call is not e"ercised there is no

+ross profit and the in'estor loses the full a%ount of the pre%iu%. The return is 40 −(.)*J

4(.)*−1.00 −100GJ.


Difficulty: Basic

Topic: Options

. n option &ith an e"ercise price equal to the underlyin+ asset9s price is. &orthless.!. in the %oney.C. at the %oney.

#. out of the %oney.$. theoretically i%possible.

This is the definition of Fat the %oneyF. The option has a %arket 'alue and %ay increase in'alue if there are fa'orable price %o'e%ents in the underlyin+ asset before the e"pirationdate.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Options

20-




. To the option holder put options are &orth >>>>>> &hen the e"ercise price is hi+her? calloptions are &orth >>>>>> &hen the e"ercise price is hi+her.. %ore? %ore. %ore? less

C. less? %ore#. less? less$. It doesn9t %atter - they are too risky to be included in a reasonable person9s portfolio.

The holder of the put &ould prefer to sell the asset to the &riter at a hi+her e"ercise price. Theholder of the call &ould prefer to buy the asset fro% the &riter at a lo&er e"ercise price.

AACSB: Analytic

Bloom's: Remember


100. Dhat happens to an option if the underlyin+ stock has a 2-for-1 split=. There is no chan+e in either the e"ercise price or in the nu%ber of options held.!. The e"ercise price &ill adust throu+h nor%al %arket %o'e%ents? the nu%ber of options&ill re%ain the sa%e.C. The e"ercise price &ould beco%e half of &hat it &as and the nu%ber of options held&ould double.#. The e"ercise price &ould double and the nu%ber of options held &ould double.$. There is no standard rule - each corporation has its o&n policy.

This is si%ilar to &hat happens to the underlyin+ stock.

AACSB: Analytic


Topic: Options

20-




101. Dhat happens to an option if the underlyin+ stock has a (-for-1 split=. There is no chan+e in either the e"ercise price or in the nu%ber of options held.!. The e"ercise price &ill adust throu+h nor%al %arket %o'e%ents? the nu%ber of options&ill re%ain the sa%e.

C. The e"ercise price &ould beco%e one third of &hat it &as and the nu%ber of options held&ould triple.#. The e"ercise price &ould triple and the nu%ber of options held &ould triple.$. There is no standard rule - each corporation has its o&n policy.

This is si%ilar to &hat happens to the underlyin+ stock.

AACSB: Analytic

Bloom's: Remember


102. 5uppose that you purchased a call option on the 537 100 inde". The option has ane"ercise price of ,0 and the inde" is no& at 20. Dhat &ill happen &hen you e"ercise theoption=. ;ou &ill ha'e to pay 4,0.!. ;ou &ill recei'e 420.C. ;ou &ill recei'e 4,0.D. ;ou &ill recei'e 4)000.$. ;ou &ill ha'e to pay 4)000.

Dhen an inde" option is e"ercised the &riter of the option pays cash to the option holder. Thea%ount of cash equals the difference bet&een the e"ercise price of the option and the 'alue of

the inde". In this case you &ill recei'e 20–,0 )0 ti%es the 4100 %ultiplier or 4)000.

In other &ords you are i%plicitly buyin+ the inde" for ,0 and sellin+ it to the call &riter for20.

AACSB: Analytic

Bloom's: Understand


Topic: Options

20-




10(. 5uppose that you purchased a call option on the 537 100 inde". The option has ane"ercise price of 00 and the inde" is no& at ,0. Dhat &ill happen &hen you e"ercise theoption=. ;ou &ill ha'e to pay 4,000.

. ;ou &ill recei'e 4,000.C. ;ou &ill recei'e 400.#. ;ou &ill recei'e 4,0.$. ;ou &ill ha'e to pay 4000.

Dhen an inde" option is e"ercised the &riter of the option pays cash to the option holder. Thea%ount of cash equals the difference bet&een the e"ercise price of the option and the 'alue of

the inde". In this case you &ill recei'e ,0–00 ,0 ti%es the 4100 %ultiplier or 4,000.

In other &ords you are i%plicitly buyin+ the inde" for 00 and sellin+ it to the call &riter for,0.

AACSB: Analytic

Bloom's: Understand


Topic: Options

Short Answer Questions

10). Dhat is the Option Clearin+ Corporation OCCJ and ho& does this or+aniation facilitateoption tradin+=

The OCC is the other side of e'ery option transaction. s a result the buyers and sellers donot ha'e to be %atched &ith each other. In addition the OCC +uarantees their side of thetransaction.

<eedback: The purpose of this question is to ascertain &hether the student understands ho&the options %arket differs fro% the %arkets pre'iously studied in ter%s of the e"istence of theF%iddlepersonF in the options %arket.

AACSB: Reflecti!e Thin"in Bloom's: Understand Difficulty: Basic

Topic: Options

20-0




10*. #escribe the protecti'e put. Dhat are the ad'anta+es of such a strate+y=

protecti'e put consists of in'estin+ in stock and si%ultaneously purchasin+ a put option onthe stock. @e+ardless of &hat happens to the price of the stock you are +uaranteed a payoff

equal to the put option e"ercise price.

<eedback: The purpose of this question is to deter%ine if the student understands the%echanis% of one the %ore co%%on and less co%ple" option strate+ies.



Topic: Options

10,. #iscuss the differences in &ritin+ co'ered and naked calls. re risks in'ol'ed in the t&ostrate+ies si%ilar or different= $"plain.

Dritin+ a co'ered call is sellin+ a call on stock the in'estor o&ns. Thus this strate+y is 'eryconser'ati'e? the in'estor recei'es the pre%iu% inco%e fro% &ritin+ the call. If the call ise"ercised the stock is called a&ay fro% the in'estor? thus the in'estor has li%ited his or herupside potential.Dritin+ a naked call is a 'ery risky strate+y. The in'estor sells a call on a stock the in'estordoes not o&n. If the price of the stock increases the option &ill be e"ercised and the in'estor%ust +o into the open %arket and buy the stock at the pre'ailin+ %arket price.Theoretically the price to &hich the stock can increase is unli%ited? thus the in'estor9s

potential loss in unli%ited.

<eedback: The purpose of this question is to be sure that the student differentiates bet&een the'ery co%%on and conser'ati'e strate+y of &ritin+ co'ered calls and the risky strate+y of&ritin+ naked calls.

AACSB: Reflecti!e Thin"in Bloom's: Understand


Topic: Options

20-1




10. #ra& a +raph that sho&s the payoff and profit to the holder of a call option at e"piration.#ra& another +raph that sho&s the payoff to the holder of a put option at e"piration. #ra& athird +raph that sho&s the payoff of a lon+ straddle at e"piration. !e sure to label the a"es andall other rele'ant features of the +raphs.

The first +raph should look like <i+ure 20.2. The second +raph should look like <i+ure 20.).The third +raph should look like panel C in <i+ure 20.. The labels on the +raph shouldinclude 5tock 7rice on the horiontal a"is Nalue of the Option on the 'ertical a"is profite"ercise price and price of the option as sho&n in the te"tbook fi+ures.

<eedback: This question allo&s the student to de%onstrate his or her understandin+ of theoptions concepts in a 'isual &ay. The third +raph %easures the student9s co%prehension of thestraddle approach.

AACSB: Reflecti!e Thin"in

Bloom's: Understand


20-2




10. 8ist three types of e"otic options and describe their characteristics.

There are fi'e e"otic options %entioned in the te"tbook:

• sian Options ha'e payoffs that depend on the a'era+e price of the underlyin+ asset durin+

at least so%e portion of the life of the option.• !arrier Options ha'e payoffs that depend both on the asset9s price at e"piration and on

&hether the underlyin+ asset9s price has crossed throu+h so%e barrier. If the asset9s pricecrosses the barrier the option %i+ht auto%atically e"pire. Or if the asset9s price does not crossthe barrier the option %ay not pay.

• 8ookback Options ha'e payoffs linked to the %a"i%u% or %ini%u% price durin+ the life of

the option. The option &ould Flook backF to see &hat the rele'ant price &as and the payoff&ould be based on that rather than on the price at the e"piration date.

• Currency-Translated Options ha'e either asset or e"ercise prices denoted in a forei+n

currency. <or e"a%ple an e"chan+e rate %ay be specified as the rate at &hich a forei+ncurrency can be con'erted into dollars.

• !inary Options are based on t&o possible outco%esyes or no. If a specified e'ent

happens the option %ay %ake a payoff of a fi"ed a%ount. If the e'ent does not happen there%ay be no payoff. The opposite arran+e%ent is also possible.

<eedback: This question +i'es the student an opportunity to e"plore so%e of the results offinancial en+ineerin+. It 'erifies the student9s understandin+ of ite%s that +o beyond the basicoptions.

AACSB: Reflecti!e Thin"in

Bloom's: Understand


Topic: Options

ch 20 options markets: introduction

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