. You purchase one IBM July 120 call contract for a premium of $5. You hold the option unt, Exams of Financial Accounting

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Chapter 15 Options Markets Answer Key

Multiple Choice Questions

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 profit B. $200 loss C. $300 profit D. $300 loss Long Call Profit = Max[0,($123 - $120)(100)] - $500 = -$ Difficulty: Medium
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 profit B. $200 loss C. $500 profit D. $500 loss Long Call Profit = Max[0,($123 - $125)(100)] - $500 = -$ Difficulty: Medium

6. All else the same, an ______ style option will be ______ valuable than a ______ style option. A. American, more, European B. American, less, European C. American, more, Canadian D. American, less, Canadian Difficulty: Medium
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) Difficulty: Medium
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) Difficulty: Medium
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 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 Difficulty: Easy

10. An Asian call option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life Difficulty: Easy
11. An Asian put option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life Difficulty: Easy
12. A down-and-out option _______________. A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option C. expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option Difficulty: Easy

16. A lookback option provides its holder with _______________. 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 option Difficulty: Easy
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 P 0 is the original premium of the put option. A. Max(P 0 , X - ST - P 0 ) B. Min(-P 0 , X - ST - P 0 ) C. Min(P 0 , ST - X + P 0 ) D. Max(0, ST - X - P 0 ) Difficulty: Hard
18. Longer term American style options with maturities of up to three years are called __________. A. warrants B. LEAPS C. GICs D. CATs Difficulty: Easy

19. The initial maturities of most exchange traded options are generally __________. A. less than a year B. less than 2 years C. between 1 and 2 years D. between 1 and 3 years Difficulty: Easy
20. 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 price B. purchase a futures contract for the delivery of options on a particular stock C. purchase a futures contract at a specified price for a specified period of time D. deliver a futures contract and receive a specified price at a specific date in the future Difficulty: Easy
21. Exchange traded stock options expire on the _______________ of the expiration month. A. second Monday B. third Wednesday C. second Thursday D. third Friday Difficulty: Medium
22. The writer of a put option _______________. A. agrees to sell shares at a set price if the option holder desires B. agrees to buy shares at a set price if the option holder desires C. has the right to buy shares at a set price D. has the right to sell shares at a set price Difficulty: Easy

27. In 1973, trading of standardized options on a national exchange started on the _________. A. AMEX B. CBOE C. NYSE D. CFTC Difficulty: Easy
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 Difficulty: Easy
29. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is _________. A. at the money B. in the money C. out of the money D. knocked out Difficulty: Easy
30. You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________. A. time spread B. long straddle C. short straddle D. money spread Difficulty: Easy

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. at the money B. in the money C. out of the money D. knocked in Difficulty: Easy
32. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered call B. long straddle C. naked call D. money spread Difficulty: Easy
33. You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September and 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 spread B. long straddle C. short straddle D. money spread Difficulty: Easy
34. A European 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 Difficulty: Easy

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. II only B. II and IV only C. I, II and III only D. I, II, III and IV Difficulty: Medium
39. The maximum loss a buyer of a stock call option can suffer is the _________. A. call premium B. stock price C. stock price minus the value of the call D. strike price minus the stock price Difficulty: Easy
40. 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. Difficulty: Medium

41. A European put option gives its holder 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 Difficulty: Easy
42. The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premium B. larger the lower the stock price C. limited D. unlimited Difficulty: Medium
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. decrease, decrease B. decrease, increase C. increase, decrease D. increase, increase Difficulty: Medium
44. Buyers of listed options __________ required to post margins and writers of naked listed options __________ required to post margins. A. are; are not B. are; are C. are not; are D. are not; are not Difficulty: Medium

49. The September 14, 2009 price quotation for a Boeing call option with a strike price of $ due to expire in November is $3.50 while the stock price of Boeing is $51. The premium on one Boeing November 50 call contract is _________. A. $ B. $2. C. $250. D. $350. Difficulty: Easy
50. 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. $ B. $1, C. $11, D. $12, Profit = 100(120 - 10) = 11,000. Difficulty: Medium
51. 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. $ B. $ C. $ D. unlimited Loss = 100(1.25 + 4.50) = 575.00 if stock price is $50 at expiration. Difficulty: Medium

52. 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 __________ in August. A. only if the stock price is either lower than $44.25 or higher than $55. B. only if the stock price is between $44.25 and $55. C. only if the stock price is higher than $55. D. only if the stock price is lower than $44. You have positive profit in the range $50 - ($1.25 + $4.50) and $50 + ($1.25 + $4.50) Difficulty: Medium
53. 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. $ B. $ C. $ D. $1, Profit = 100 [(79 - 75)] - 8.50 + 6.00] = $ Difficulty: Hard
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. Writing an uncovered call option B. Writing an uncovered put option C. Buying a call option D. Buying a put option Difficulty: Easy

57. To establish a bull money spread with calls you would _______________. A. buy the 55 call and sell the 45 call B. buy the 45 call and buy the 55 call C. buy the 45 call and sell the 55 call D. sell the 45 call and sell the 55 call Difficulty: Medium
58. Ignoring commissions, the cost to establish the bull money spread with calls would be _______. A. $1, B. $ C. $ D. $400 income rather than cost To 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 $2.00 premium. The initial cost is ($2.00 - $8.50)(100) = -$650. Difficulty: Hard
59. If in June the stock price is $53 your net profit on the bull money spread would be ________. A. $ B. -$ C. $ D. $ ST = $53 at contract maturity in June. Profit = C45,June - C55,June - Initial Cost Profit = Max(0,$53 - $45)-Max(0, $53 - $55) - $650 = $ Difficulty: Hard

60. To establish a bull money spread with puts you would _______________. 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 put Difficulty: Medium
61. 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. $ To establish a bull money spread with puts you would buy the 45 put at a cost of $2.00 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 - $2.00)(100) = $550. ST = $52 at contract maturity in June. Profit = P45,June - P55,June + Initial Revenue Profit = Max(0,$45 - $52) - Max(0, $55 - $52) + $550 = $ Difficulty: Hard The common stock of the Avalon Corporation has been trading in a narrow range around $ 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.
62. 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 Difficulty: Medium