Name: __________________________ Date: _____________



1.
You purchase one IBM March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?
A.
$10,000
B.
$10,600
C.
$9,400
D.
$9,000
E.
none of the above


You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3.
Reference: 20B

2.
At expiration, you break even if the stock price is equal to
A.
$52.
B.
$60.
C.
$68.
D.
both A and C.
E.
none of the above.


3.
A covered call position is equivalent to a
A.
long put.
B.
short put.
C.
long straddle.
D.
vertical spread.
E.
none of the above.


4.
The put-call parity theorem
A.
represents the proper relationship between put and call prices.
B.
allows for arbitrage opportunities if violated.
C.
may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.
D.
all of the above.
E.
none of the above.


5.
Suppose that you purchased a call option on the S&P 100 index. The option has an exercise price of 680 and the index is now at 720. What will happen when you exercise the option?
A.
You will have to pay $680.
B.
You will receive $720.
C.
You will receive $680.
D.
You will receive $4,000.
E.
You will have to pay $4,000.


6.
Trading in “exotic options” takes place
A.
on the New York Stock Exchange.
B.
in the over-the-counter market.
C.
on the American Stock Exchange.
D.
in the primary marketplace.
E.
none of the above.


Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.
Reference: 20A

7.
The maximum potential profit of your strategy is
A.
$600.
B.
$500.
C.
$200.
D.
$300.
E.
$100


8.
You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position?
A.
$50
B.
$55
C.
$45
D.
$40
E.
none of the above


9.
Discuss the differences in writing covered and naked calls. Are risks involved in the two strategies similar or different? Explain.

Answer:


10.
Currency options and currency futures options have different values because
A.
the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity.
B.
the payoff on the currency option depends on the exchange rate futures price at maturity, while the currency futures option's payoff depends on the exchange rate at maturity.
C.
currency options are American while currency futures options are European.
D.
currency futures options are American while currency options are European.
E.
currency options are quoted in U.S. dollars while currency futures options are quoted in the foreign currency.


11.
Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________.
A.
increase; increase
B.
decrease; increase
C.
increase; decrease
D.
decrease; decrease
E.
cannot tell without further information


12.
An American call option allows the buyer to
A.
sell the underlying asset at the exercise price on or before the expiration date.
B.
buy the underlying asset at the exercise price on or before the expiration date.
C.
sell the option in the open market prior to expiration.
D.
A and C.
E.
B and C.


13.
Call options on IBM listed stock options are
A.
issued by IBM Corporation.
B.
created by investors.
C.
traded on various exchanges.
D.
A and C.
E.
B and C.


14.
The lower bound on the market price of a convertible bond is
A.
its straight bond value.
B.
its crooked bond value.
C.
its conversion value.
D.
A and C.
E.
none of the above


15.
The maximum loss the writer of a stock put option can suffer is equal to
A.
the put premium.
B.
the striking price.
C.
the stock price minus the put premium.
D.
the striking price minus the put premium.
E.
none of the above.


16.
The potential loss for a writer of a naked call option on a stock is
A.
limited.
B.
unlimited.
C.
larger the lower the stock price.
D.
equal to the call premium.
E.
none of the above.


17.
The intrinsic value of an in-the-money put option is equal to
A.
the stock price minus the exercise price.
B.
the put premium.
C.
zero.
D.
the exercise price minus the stock price.
E.
none of the above.


18.
Lookback options have payoffs that
A.
have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option.
B.
have payoffs that only depend on the minimum price of the underlying asset during the life of the option.
C.
have payoffs that only depend on the maximum price of the underlying asset during the life of the option.
D.
are known in advance.
E.
none of the above.


19.
Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share
A.
increases to $104.
B.
decreases to $90.
C.
increases to $105.
D.
decreases to $96.
E.
none of the above.


20.
The intrinsic value of an out-of-the-money call option is equal to
A.
the call premium.
B.
zero.
C.
the stock price minus the exercise price.
D.
the striking price.
E.
none of the above.


21.
A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is -0.30 and the stock is currently selling for $46, what is the elasticity of the put?
A.
2.76
B.
2.30
C.
-7.67
D.
-2.76
E.
-2.30


22.
Options sellers who are delta-hedging would most likely
A.
sell when markets are falling .
B.
buy when markets are rising.
C.
both A and B.
D.
sell whether markets are falling or rising.
E.
buy whether markets are falling or rising.


An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14.
Reference: 21B

23.
If the company unexpectedly announces it will pay its first-ever dividend 4 months from today, you would expect that
A.
the call price would increase.
B.
the call price would decrease.
C.
the call price would not change.
D.
the put price would decrease.
E.
the put price would not change.


24.
A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A.
+$700
B.
+$500
C.
-$1,150
D.
-$520
E.
none of the above


25.
A hedge ratio for a call is always
A.
equal to one.
B.
greater than one.
C.
between zero and one.
D.
between minus one and zero.
E.
of no restricted value.


An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.
Reference: 21A

26.
If the risk-free rate is 6%, what should be the value of a put option on the same stock with the same strike price and expiration date?
A.
$3.00
B.
$2.02
C.
$12.00
D.
$5.25
E.
$8.00


27.
Use the two-state put option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____; the hedge ratio is _______.
A.
$0 and $40; -4/7
B.
$0 and $50; +4/7
C.
$0 and $40; +4/7
D.
$0 and $50; -4/7
E.
$20 and $40; +1/2


28.
Discuss the relationship between option prices and time to expiration, volatility of the underlying stocks, and the exercise price.

Answer:


An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.
Reference: 21A

29.
What is the intrinsic value of the call?
A.
$12
B.
$8
C.
$0
D.
$23
E.
none of the above.


30.
Delta is defined as
A.
the change in the value of an option for a dollar change in the price of the underlying asset.
B.
the change in the value of the underlying asset for a dollar change in the call price.
C.
the percentage change in the value of an option for a one percent change in the value of the underlying asset.
D.
the change in the volatility of the underlying stock price.
E.
none of the above.


31.
A put option on the S&P 500 index will best protect ________
A.
a portfolio of 100 shares of IBM stock.
B.
a portfolio of 50 bonds.
C.
a portfolio that corresponds to the S&P 500.
D.
a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks.
E.
a portfolio that replicates the Dow.


32.
If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be ________.
A.
0.30
B.
0.50
C.
-0.60
D.
-0.50
E.
-.17


An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.
Reference: 21A

33.
What is the time value of the call?
A.
$8
B.
$12
C.
$0
D.
$4
E.
cannot be determined without more information.


An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.
Reference: 21A

34.
If the option has delta of .5, what is its elasticity?
A.
4.17
B.
2.32
C.
1.79
D.
0.5
E.
1.5


35.
The dollar change in the value of a stock call option is always
A.
lower than the dollar change in the value of the stock.
B.
higher than the dollar change in the value of the stock.
C.
negatively correlated with the change in the value of the stock.
D.
B and C.
E.
A and C.


36.
A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A.
long 0.70 calls for each short stock.
B.
short 0.70 calls for each long stock.
C.
long 0.70 shares for each short call.
D.
long 0.70 shares for each long call.
E.
none of the above.


37.
The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.
A.
positively, positively
B.
negatively, positively
C.
negatively, negatively
D.
positively, negatively
E.
not, not


38.
If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be. _______.
A.
0.60
B.
0.40
C.
-0.60
D.
-0.40
E.
-.17


39.
Dollar movements in option prices is ________ than dollar movements in the stock price, and rate of return volatility of options is ________ than stock return volatility.
A.
less, less
B.
greater, greater
C.
less, greater
D.
greater, less
E.
There is no particular pattern.


40.
As the underlying stock's price increased, the call option valuation function's slope approaches
A.
zero.
B.
one.
C.
two times the value of the stock.
D.
one-half time s the value of the stock.
E.
infinity



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