Question 1

A covered call strategy benefits from what environment?

Accepted Answer

A)   Falling interest rates
B)   Price stability
C)   Price volatility
D)   Unexpected eventsE) B) and C)
F) All of the above

Question 2

In 1973,trading of standardized options on a national exchange started on the _________.

Accepted Answer

A)   AMEX
B)   CBOE
C)   NYSE
D)   CFTCE) None of the above
F) B) and C)

Question 3

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.

Accepted Answer

A)   Max(0, ST - X) 
B)   Min(0, ST - X) 
C)   Max(0, X - ST) 
D)   Min(0, X - ST) E) All of the above
F) C) and D)

Question 4

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

Accepted Answer

A)   II, III and IV only
B)   I, III and IV only
C)   I, II and III only
D)   I, II, III and IVE) B) and D)
F) A) and C)

Question 5

You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Accepted Answer

A)   $200 profit
B)   $200 loss
C)   $300 profit
D)   $300 lossE) B) and D)
F) B) and C)

Question 6

The maximum loss a buyer of a stock call option can suffer is the _________.

Accepted Answer

A)   call premium
B)   stock price
C)   stock price minus the value of the call
D)   strike price minus the stock priceE) None of the above
F) A) and B)

Question 7

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: 
-Ignoring commissions,the cost to establish the bull money spread with calls would be _______.

Accepted Answer

A)   $1,050
B)   $650
C)   $400
D)   $400 income rather than costE) None of the above
F) All of the above

Question 8

A "bet" option is also called a ____ option.

Accepted Answer

A)   barrier
B)   lookback
C)   digital
D)   foreign exchangeE) A) and B)
F) C) and D) C

Question 9

You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months.You are considering either using puts or calls to hedge this position.Given this,which of the following statements is/are correct?
I.One way to hedge your position would be to buy puts.
II.One way to hedge your position would be to write calls.
III.If major stock price declines are likely the hedging with puts is probably better than hedging with short calls.

Accepted Answer

A)   I only
B)   II only
C)   I and III only
D)   I, II and IIIE) A) and D)
F) All of the above D

Question 10

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 an ______ option.

Accepted Answer

A)   American
B)   European
C)   Asian
D)   AustralianE) None of the above
F) A) and C)

Question 11

A quanto provides its holder with ______________.

Accepted Answer

A)   the right to participate in the payoffs from a portfolio of gambling casino stocks
B)   the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
C)   the right to participate in the investment performance of a foreign security
D)   the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rateE) None of the above
F) A) and C)

Question 12

Which one of the following is a correct statement?

Accepted Answer

A)   Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.
B)   A convertible bond consists of a straight bond plus a specified number of detachable warrants.
C)   Call options always have an initial maturity greater than one year while warrants have an initial maturity less than one year.
D)   Call options may be convertible into the stock while warrants are not convertible into the stock.E) A) and D)
F) C) and D)

Question 13

A European call option gives the buyer the right to _________.

Accepted Answer

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 dateE) B) and D)
F) None of the above

Question 14

Advantages of exchange traded options over OTC options include all but which one of the following?

Accepted Answer

A)   Ease and low cost of trading
B)   Anonymity of participants
C)   Contracts that are tailored to meet the needs of market participants
D)   No concerns about counterparty credit riskE) C) and D)
F) A) and D)

Question 15

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 _______________.

Accepted Answer

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 putE) None of the above
F) A) and C) A

Question 16

A convertible bond is deep in the money.This means the bond price will closely track the __________.

Accepted Answer

A)   straight debt value of the bond
B)   conversion value of the bond
C)   straight debt value of the bond minus the conversion value
D)   straight debt value of the bond plus the conversion valueE) A) and D)
F) All of the above

Question 17

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 three months. The price of a three-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.
-Selling a straddle would generate total premium income of _____.

Accepted Answer

A)   $300
B)   $400
C)   $500
D)   $700E) A) and B)
F) C) and D)

Question 18

A lookback option provides its holder with _______________.

Accepted Answer

A)   a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option
B)   a payoff determined by the difference between the maximum and minimum price of the underlying stock during the life of the option
C)   a payoff if the firm's stock price falls below some specified dollar amount during the term of the option
D)   a payoff based on the average price of the underlying stock over the life of the optionE) A) and B)
F) B) and D)

Question 19

Which of the following strategies makes a profit if the stock price stays stable?

Accepted Answer

A)   Long call and short put
B)   Long call and long put
C)   Short call and short put
D)   Short call and long putE) C) and D)
F) B) and C)

Question 20

Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock and Bond B is not.Bond A is priced at $1,245 and Bond B is priced at $1,120.Bond A has a promised yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%.The stock of Bond A is trading at $49.80 per share.Which of the following statements is/are correct?
I.The value of the conversion option for Bond A is $125.
II.The lower promised yield to maturity of Bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III.Bond A can be converted into 25 shares of stock.

Accepted Answer

A)   II only
B)   I and III only
C)   III only
D)   I, II and IIIE) A) and C)
F) A) and B)

Exam 15: Options Markets

A covered call strategy benefits from what environment?

Correct Answer
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In 1973,trading of standardized options on a national exchange started on the _________.

Correct Answer
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At contract maturity the value of a call option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.

Correct Answer
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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

Correct Answer
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You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Correct Answer
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The maximum loss a buyer of a stock call option can suffer is the _________.

Correct Answer
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A "bet" option is also called a ____ option.

Correct Answer
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C

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D

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 an ______ option.

Correct Answer
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A quanto provides its holder with ______________.

Correct Answer
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Which one of the following is a correct statement?

Correct Answer
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A European call option gives the buyer the right to _________.

Correct Answer
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Advantages of exchange traded options over OTC options include all but which one of the following?

Correct Answer
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A

A convertible bond is deep in the money.This means the bond price will closely track the __________.

Correct Answer
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A lookback option provides its holder with _______________.

Correct Answer
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Which of the following strategies makes a profit if the stock price stays stable?

Correct Answer
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Exam 15: Options Markets

A covered call strategy benefits from what environment?

Correct AnswerverifiedShow Answer

In 1973,trading of standardized options on a national exchange started on the _________.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You purchase one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM stock sells for $123 per share.You will realize a ______ on the investment.

Correct AnswerverifiedShow Answer

The maximum loss a buyer of a stock call option can suffer is the _________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A "bet" option is also called a ____ option.

Correct AnswerverifiedC

Correct AnswerverifiedD

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 an ______ option.

Correct AnswerverifiedShow Answer

A quanto provides its holder with ______________.

Correct AnswerverifiedShow Answer

Which one of the following is a correct statement?

Correct AnswerverifiedShow Answer

A European call option gives the buyer the right to _________.

Correct AnswerverifiedShow Answer

Advantages of exchange traded options over OTC options include all but which one of the following?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

A convertible bond is deep in the money.This means the bond price will closely track the __________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A lookback option provides its holder with _______________.

Correct AnswerverifiedShow Answer

Which of the following strategies makes a profit if the stock price stays stable?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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At contract maturity the value of a call option is ___________ where X equals the option's strike price and S_T is the stock price at contract expiration.

Correct Answer
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C

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D

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A

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