Finance 327: Chapter 15

1. 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. A. $200 profitB. $200 lossC. $300 profitD. $300 loss bLong call profit = Max [0, ($123 – $120)(100)] – $500 = -$200
2. You purchase one IBM July 125 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. A. $200 profitB. $200 lossC. $500 profitD. $500 loss dLong call profit = Max [0, ($123 – $125)(100)] – $500 = -$500
3. You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $300 profitB. $300 lossC. $500 lossD. $200 profit bLong put profit = Max [0, ($120 – $123)(100)] – $300 = -$300
4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment. A. $300 profitB. $200 lossC. $600 lossD. $200 profit aShort call profit = Min [0, ($120 – $121)(100)] + $400 = $300
5. ______ option can only be exercised on the expiration date. A. A MexicanB. An AsianC. An AmericanD. A European d
6. All else the same, an American style option will be ______ valuable than a ______ style option. A. more; European-B. less; European-C. more; Canadian-D. less; Canadian- a
7. At contract maturity the value of a call option is ___________, where X equals the option’s strike price and ST is the stock price at contract expiration. A. Max (0, ST – X)B. Min (0, ST – X)C. Max (0, X – ST)D. Min (0, X – ST) a
8. At contract maturity the value of a put option is ___________, where X equals the option’s strike price and ST is the stock price at contract expiration. A. Max (0, ST – X)B. Min (0, ST – X)C. Max (0, X – ST)D. Min (0, X – ST) c
9. An American put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at the exercise price only at the expiration dateC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at the exercise price only at the expiration date c
An Asian call option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at a price determined by the average stock price during some specified portion of the option’s lifeC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at a price determined by the average stock price during some specified portion of the option’s life b
An Asian put option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at a price determined by the average stock price during some specified portion of the option’s lifeC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at a price determined by the average stock price during some specified portion of the option’s life d
A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise priceB. buying two options that have the same expiration dates but different strike pricesC. selling two options that have the same expiration dates but different strike pricesD. selling an option with one expiration date and buying a similar option with a different expiration date d
A quanto provides its holder with the right to ______________. A. participate in the payoffs from a portfolio of gambling casino stocksB. exchange a fixed amount of a foreign currency for dollars at a specified exchange rateC. participate in the investment performance of a foreign securityD. exchange the payoff from a foreign investment for dollars at a fixed exchange rate d
You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option’s strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A. Max (-C0, ST – X – C0)B. Min (-C0, ST – X – C0)C. Max (C0, ST – X + C0)D. Max (0, ST – X – C0) a
Strips and straps are variations of __________. A. straddlesB. collarsC. money spreadsD. time spreads a
You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option’s strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. A. Max (P0, X – ST – P0)B. Min (-P0, X – ST – P0)C. Min (P0, ST – X + P0)D. Max (0, ST – X – P0) c
Longer-term American-style options with maturities of up to 3 years are called __________. A. warrantsB. LEAPSC. GICsD. CATs b
The initial maturities of most exchange-traded options are generally __________. A. less than 1 yearB. less than 2 yearsC. between 1 and 2 yearsD. between 1 and 3 years a
A futures call option provides its holder with the right to ___________. A. purchase a particular stock at some time in the future at a specified priceB. purchase a futures contract for the delivery of options on a particular stockC. purchase a futures contract at a specified price for a specified period of timeD. deliver a futures contract and receive a specified price at a specific date in the future c
Exchange-traded stock options expire on the _______________ of the expiration month. A. second MondayB. third WednesdayC. second ThursdayD. third Friday d
The writer of a put option _______________. A. agrees to sell shares at a set price if the option holder desiresB. agrees to buy shares at a set price if the option holder desiresC. has the right to buy shares at a set priceD. has the right to sell shares at a set price b
Advantages of exchange-traded options over OTC options include all but which one of the following? A. Ease and low cost of tradingB. Anonymity of participantsC. Contracts that are tailored to meet the needs of market participantsD. No concerns about counterparty credit risk c
Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. c
Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price. A. $1B. $5C. $20D. $25 b
You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________. A. time spreadB. long straddleC. short straddleD. money spread b
In 1973, trading of standardized options on a national exchange started on the _________. A. AMEXB. CBOEC. NYSED. CFTC b
An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at the exercise price only at the expiration dateC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at the exercise price only at the expiration date a
A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. A. at the moneyB. in the moneyC. out of the moneyD. knocked out b
You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________. A. time spreadB. long straddleC. short straddleD. money spread d
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. at the moneyB. in the moneyC. out of the moneyD. knocked in b
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered callB. long straddleC. naked callD. money spread a
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________. A. time spreadB. long straddleC. short straddleD. money spread a
A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at the exercise price only at the expiration dateC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at the exercise price only at the expiration date b
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddleB. naked putC. protective putD. short stroll c
The value of a listed call option on a stock is lower when:I. The exercise price is higher.II. The contract approaches maturity.III. The stock decreases in value.IV. A stock split occurs. A. II, III, and IV onlyB. I, III, and IV onlyC. I, II, and III onlyD. I, II, III, and IV c
The Option Clearing Corporation is owned by _________. A. the exchanges on which stock options are tradedB. the Federal Deposit Insurance CorporationC. the Federal Reserve SystemD. major U.S. banks a
The value of a listed put option on a stock is lower when:I. The exercise price is higher.II. The contract approaches maturity.III. The stock decreases in value.IV. A stock split occurs. A. II onlyB. II and IV onlyC. I, II, and III onlyD. I, II, III, and IV a
The maximum loss a buyer of a stock call option can suffer is the _________. A. call premiumB. stock priceC. stock price minus the value of the callD. strike price minus the stock price a
Which one of the statements about margin requirements on option positions is not correct? A. The margin required will be higher if the option is in the money.B. If the required margin exceeds the posted margin, the option writer will receive a margin call.C. A buyer of a put or call option does not have to post margin.D. Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash. d
A European put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration dateB. buy the underlying asset at the exercise price only at the expiration dateC. sell the underlying asset at the exercise price on or before the expiration dateD. sell the underlying asset at the exercise price only at the expiration date d
The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premiumB. larger the lower the stock priceC. limitedD. unlimited d
A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. A. decrease; decreaseB. decrease; increaseC. increase; decreaseD. increase; increase a
Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. A. are; are notB. are; areC. are not; areD. are not; are not c
An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option. A. an AmericanB. a EuropeanC. an AsianD. an Australian c
Which of the following expressions represents the value of a call option to its holder on the expiration date? A. ST – X if ST > X, 0 if ST ≤ XB. – (ST – X) if ST > X, 0 if ST ≤ XC. 0 if ST ≥ X, X – ST if ST < XD. 0 if ST ≥ X, – (X – ST) if ST < X a
A “bet” option is also called a ____ option. A. barrierB. lookbackC. digitalD. foreign exchange c
Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A. SPXB. DJXC. CMED. OEX d
The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________. A. $1,980B. $4,900C. $5,000D. $2,080Premium = $20.80 × 100 = $2,080 dPremium = $20.80 × 100 = $2,080
You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________. A. $120B. $1,000C. $11,000D. $12,000Profit = 100(120 – 10) = 11,000 cProfit = 100(120 – 10) = 11,000
You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________. A. $125B. $450C. $575D. unlimitedLoss = 100(1.25 + 4.50) = 575 if stock price is $50 at expiration cLoss = 100(1.25 + 4.50) = 575 if stock price is $50 at expiration.
You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August. A. either lower than $44.25 or higher than $55.75B. between $44.25 and $55.75C. higher than $55.75D. lower than $44.25You have positive profit in the range $50 – ($1.25 + $4.50) and $50 + ($1.25 + $4.50). bYou have positive profit in the range $50 – ($1.25 + $4.50) and $50 + ($1.25 + $4.50).
Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________. A. $150B. $400C. $600D. $1,850Profit = 100[(79 – 75)] – 8.50 + 6] = $150 aProfit = 100[(79 – 75)] – 8.50 + 6] = $150
__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. A. Writing an uncovered call optionB. Writing an uncovered put optionC. Buying a call optionD. Buying a put option b
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 calls, you would _______________. A. buy the 55 call and sell the 45 callB. buy the 45 call and buy the 55 callC. buy the 45 call and sell the 55 callD. sell the 45 call and sell the 55 call c
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 _______. A. $1,050B. $650C. $400D. $400 income rather than costTo establish a bull money spread with calls, you would buy the 45 call at a cost of $8.50 and write the 55 call, earning the $2 premium. The initial cost is ($2 – $8.50)(100) = -$650. bTo establish a bull money spread with calls, you would buy the 45 call at a cost of $8.50 and write the 55 call, earning the $2 premium. The initial cost is ($2 – $8.50)(100) = -$650.
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: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________. A. $300B. -$400C. $150D. $50ST = $53 at contract maturity in JuneProfit = C45, June – C55, June – Initial costProfit = [Max (0, $53 – $45) – Max (0, $53 – $55)](100) – $650 = $150 cST = $53 at contract maturity in JuneProfit = C45, June – C55, June – Initial costProfit = [Max (0, $53 – $45) – Max (0, $53 – $55)](100) – $650 = $150
You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with puts, you would _______________. A. sell the 55 put and buy the 45 putB. buy the 45 put and buy the 55 putC. buy the 55 put and sell the 45 putD. sell the 45 put and sell the 55 put a
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: Suppose you establish a bullish money spread with the puts. In June the stock’s price turns out to be $52. Ignoring commissions, the net profit on your position is _______________. A. $500B. $700C. $200D. $250To establish a bull money spread with puts, you would buy the 45 put at a cost of $2 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 – $2)(100) = $550.ST = $52 at contract maturity in JuneProfit = P45, June – P55, June + Initial revenueProfit = [Max (0, $45 – $52) – Max (0, $55 – $52)](100) + $550 = $250. dTo establish a bull money spread with puts, you would buy the 45 put at a cost of $2 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 – $2)(100) = $550.ST = $52 at contract maturity in JuneProfit = P45, June – P55, June + Initial revenueProfit = [Max (0, $45 – $52) – Max (0, $55 – $52)](100) + $550 = $250.
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement? A. Sell a call.B. Purchase a put.C. Sell a straddle.D. Buy a straddle. c
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.Selling a straddle would generate total premium income of _____. A. $300B. $400C. $500D. $700 dSell a straddle = sell a put + sell a callPremium income for selling a straddle = (P0 + C0)100 = ($3 + $4)(100) = $700
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap? A. $200B. $300C. $700D. $400 cSelling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = [(2)(4) + 3](100) = $1,100. If the final stock price is $42, the position profit is found as Profit = [-2Max ($0, $42 – 40) + Max ($0, $40 – $42)](100) + $1,100 = $700
65. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? A. Buy the call, sell the put; lend the present value of $40.B. Sell the call, buy the put; lend the present value of $40.C. Buy the call, sell the put; borrow the present value of $40.D. Sell the call, buy the put; borrow the present value of $40. a
66. A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months? A. $300B. $200C. $475D. $0 cE[Profit] = -{.60Max [$0, $50 – ($50)(1.1)] + .30Max [$0, $50 – ($50)(0.95)] + .10Max [$0, $50 – ($50)(.80)]} (100) + $650 = – [.6(0) + .3(250) + .1(1,000)] + 650 = $475
67. A covered call strategy benefits from what environment? A. Falling interest ratesB. Price stabilityC. Price volatilityD. Unexpected events b
68. You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip. A. $300 profitB. $100 lossC. $500 profitD. $200 profit cSelling an IBM July 90 strip entails selling two IBM July 90 puts and one IBM July 90 call. Initial income = C90 + 2P90 = [4 + 2(3)](100) = $1,000. If the final stock price is $95, the position value is found as:Profit = [-Max ($0, $95 – 90) + 2Max ($0, $90 – $95)](100) + $1,000 = -$500 + $1,000 = $500
69.Which strategy benefits from upside price movement and has some protection should the price of the security fall? A. Bull spreadB. Long putC. Short callD. Straddle a
70.What combination of puts and calls can simulate a long stock investment? A. Long call and short putB. Long call and long putC. Short call and short putD. Short call and long put a
71. An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor? A. $32.50B. $35C. $37.50D. $37.60Break even = 35 + 2.50 = 37.50 c
72. An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor? A. $24.15B. $25C. $25.87D. $27.86 a
73.Which of the following strategies makes a profit if the stock price stays stable? A. Long call and short putB. Long call and long putC. Short call and short putD. Short call and long put c
74.Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A. Long call and short putB. Long call and long putC. Short call and short putD. Short call and long put d
75. If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______. A. long callB. short callC. short putD. long put c
76. What strategy could be considered insurance for an investment in a portfolio of stocks? A. Covered callB. Protective putC. Short putD. Straddle b
77. What strategy is designed to ensure a value within the bounds of two different stock prices? A. CollarB. Covered CallC. Protective putD. Straddle a
78. You are convinced that a stock’s price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A. Buy a strip.B. Buy a strap.C. Buy a straddle.D. Write a straddle. b
83. You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______. A. -$15B. $200C. $85D. $185 cInitial cost = -C300 + C305 = -$68 + $53 = -$15At actual jobless claims of 303,000, at contract maturity the C300 call is worth $100 and the C305 call is worthless. Profit = +$100 – $0 – $15 = $85
84. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn’t incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill’s net position value including the option profit or loss and the stock is _________. aPosition value = 5,000 shares × $45/share = $225,000. To establish a collar, you would need 5,000/100 = 50 options. You would buy the 50 puts at a cost of $3(100)(50) = $15,000 and write the 50 calls, earning a premium of $2(100)(50) = $10,000. The initial cost is $15,000 – $10,000 = $5,000. If the stock price in January is $35, then profit can be found as:Profit = [Max ($0, $40 – $35) – Max ($0, $35 – $50)](100)(50) – $5,000 = $20,000New stock value = 5,000 shares × $35 = $175,000, so Net position value = $175,000 + $20,000 = $195,000
85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________. A. greater; lowerB. greater; greaterC. lower; greaterD. lower; lower b
86. You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment. A. $300 profitB. $100 lossC. $400 lossD. $200 profit dLong call profit = 2Max {0, [$48 – ($90/2)(100)]} – $400 = $200
87. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either 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, hedging with puts is probably better than hedging with short calls. A. I onlyB. II onlyC. I and III onlyD. I, II, and III D. I, II, and III

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