Chapter 15 Test Bank - Static PDF

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Chapter 15 Test Bank - Static Student: _______________________________________________________________________________________

1. You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

A. B. C. D.

$200 profit $200 loss $300 profit $300 loss

2. You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

A. B. C. D.

$200 profit $200 loss $500 profit $500 loss

3. You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

A. B. C. D.

$300 profit $300 loss $500 loss $200 profit

4. You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ______ on the investment.

A. B. C. D. 5. A. B. C. D.

$300 profit $200 loss $600 loss $200 profit ______ option can only be exercised on the expiration date. A Mexican An Asian An American A European

6. All else the same, an American-style option will be ______ valuable than a ______ style option. A. B. C. D. 7.

more; Europeanless; Europeanmore; Canadianless; CanadianAt 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) 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) 9. A. B. C. D.

An American put option gives its holder the right to _________. buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at the exercise price only at the expiration date sell the underlying asset at the exercise price on or before the expiration date sell the underlying asset at the exercise price only at the expiration date

10. An Asian call option gives its holder the right to ____________. A. B. C. D.

buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life sell the underlying asset at the exercise price on or before the expiration date sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11. An Asian put option gives its holder the right to ____________. A. B. C. D.

buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life sell the underlying asset at the exercise price on or before the expiration date sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12. A time spread may be executed by _____. A. B. C. D.

selling an option with one exercise price and buying a similar one with a different exercise price buying two options that have the same expiration dates but different strike prices selling two options that have the same expiration dates but different strike prices selling an option with one expiration date and buying a similar option with a different expiration date

13. Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option. A. B. C. D.

I and III only I and IV only I, II, and IV only III and IV only

14. A quanto provides its holder with the right to ______________. A. B. C. D.

participate in the payoffs from a portfolio of gambling casino stocks exchange a fixed amount of a foreign currency for dollars at a specified exchange rate participate in the investment performance of a foreign security exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.

A. max (-C0, ST - X - C0) B. min (-C0, ST - X - C0) C. max (C0, ST - X + C0) D. max (0, ST - X - C0) 16. Strips and straps are variations of __________. A. B. C. D.

straddles collars money spreads time spreads

17.

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock

price at contract expiration, and P0 is the original premium of the put option. A. max (P0, X - ST - P0) B. min (-P0, X - ST - P0) C. min (P0, ST - X + P0) D. max (0, ST - X - P0) 18. Longer-term American-style options with maturities of up to 3 years are called __________. A. B. C. D.

warrants LEAPS GICs CATs

19. The initial maturities of most exchange-traded options are generally __________. A. B. C. D.

less than 1 year less than 2 years between 1 and 2 years between 1 and 3 years

20. A futures call option provides its holder with the right to ___________. A. B. C. D.

purchase a particular stock at some time in the future at a specified price purchase a futures contract for the delivery of options on a particular stock purchase a futures contract at a specified price for a specified period of time deliver a futures contract and receive a specified price at a specific date in the future

21. Exchange-traded stock options expire on the _______________ of the expiration month. A. B. C. D.

second Monday third Wednesday second Thursday third Friday

22. The writer of a put option _______________. A. B. C. D.

agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires has the right to buy shares at a set price has the right to sell shares at a set price

23. Advantages of exchange-traded options over OTC options include all but which one of the following? 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 risk 24. Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. A. B. C. D.

1 10 100 1,000

25. Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price. A. B. C. D.

$1 $5 $20 $25

26. 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. B. C. D.

time spread long straddle short straddle money spread

27. In 1973, trading of standardized options on a national exchange started on the _________. A. B. C. D.

AMEX CBOE NYSE CFTC

28. An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date 29. 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. B. C. D.

at the money in the money out of the money knocked out

30. 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. B. C. D.

time spread long straddle short straddle money spread

31. 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. B. C. D.

at the money in the money out of the money knocked in

32. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. B. C. D.

covered call long straddle naked call money spread

33. 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. B. C. D.

time spread long straddle short straddle money spread

34. A European call option gives the buyer the right to _________. A. B. C. D.

buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at the exercise price only at the expiration date sell the underlying asset at the exercise price on or before the expiration date sell the underlying asset at the exercise price only at the expiration date

35. You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. B. C. D.

long straddle naked put protective put short stroll

36. The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. B. C. D.

II, III, and IV only I, III, and IV only I, II, and III only I, II, III, and IV

37. The Option Clearing Corporation is owned by _________. A. B. C. D.

the exchanges on which stock options are traded the Federal Deposit Insurance Corporation the Federal Reserve System major U.S. banks

38. The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. B. C. D.

II only II and IV only I, II, and III only I, II, III, and IV

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

A. B. C. D.

call premium stock price stock price minus the value of the call strike price minus the stock price

40. Which one of the statements about margin requirements on option positions is not correct?

A.The margin required will be lower 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. 41. A European put option gives its holder the right to _________. A. B. C. D.

buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at the exercise price only at the expiration date sell the underlying asset at the exercise price on or before the expiration date sell the underlying asset at the exercise price only at the expiration date

42. The potential loss for a writer of a naked call option on a stock is _________. A. B. C. D.

equal to the call premium larger the lower the stock price limited unlimited

43. 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. B. C. D.

decrease; decrease decrease; increase increase; decrease increase; increase

44. Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. A. B. C. D.

are; are not are; are are not; are are not; are not

45. 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. B. C. D.

an American a European an Asian an Australian

46. 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 ≤ X B. - (ST - X) if ST > X, 0 if ST ≤ X C. 0 if ST ≥ X, X - ST if ST < X D. 0 if ST ≥ X, - (X - ST) if ST < X 47. A "bet" option is also called a ____ option. A. B. C. D.

barrier lookback digital foreign exchange

48. Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A. B. C. D.

SPX DJX CME OEX

49. The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is _________. A. B. C. D.

$1,980 $4,900 $5,000 $2,080

.

50 You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

A. B. C. D.

$120 $1,000 $11,000 $12,000

51.

You buy one Huge-Packing August 50 call contract and one Huge-Packing 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. B. C. D.

$125 $450 $575 unlimited

52.

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing 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. B. C. D.

either lower than $44.25 or higher than $55.75 between $44.25 and $55.75 higher than $55.75 lower than $44.25

53.

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance 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. B. C. D.

$150 $400 $600 $1,850

54. __________ 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. B. C. D.

Writing an uncovered call option Writing an uncovered put option Buying a call option Buying a put option

55. Which one of the following is a correct statement? 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 1 year, while warrants have an initial maturity less than 1 year. D. Call options may be convertible into the stock, while warrants are not convertible into the stock.

56.

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

A. B. C. D.

$33; $3.50 $33; $31.50 $35; $3.50 $35; $35

57.

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. B. C. D.

buy the 55 call and sell the 45 call buy the 45 call and buy the 55 call buy the 45 call and sell the 55 call sell the 45 call and sell the 55 call

58.

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. B. C. D.

$1,050 $650 $400 $400 income rather than cost

59.

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. B. C. D.

$300 -$400 $150 $50

60.

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. B. C. D.

sell the 55 put and buy the 45 put buy the 45 put and buy the 55 put buy the 55 put and sell the 45 put sell the 45 put and sell the 55 put

61.

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. B. C. D.

$500 $700 $200 $250

62. 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

63. 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 cal...