Question 1

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) B) and C)
F) None of the above

Question 2

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 share price is ________ in August.

Accepted Answer

A)  either lower than $44.25 or higher than $55.75
B)  between $44.25 and $55.75
C)  higher than $55.75
D)  lower than $44.25E) B) and C)
F) A) and D)

Question 3

Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

Accepted Answer

A)  $200
B)  $300
C)  $700
D)  $400E) A) and B)
F) B) and C)

Question 4

A European put option gives its holder 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 C)
F) None of the above

Question 5

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 share 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) None of the above
F) A) and B)

Question 6

If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

Accepted Answer

A)  purchasing out-of-the-money call options
B)  purchasing at-the-money bull spreads
C)  purchasing in-the-money call options
D)  purchasing at-the-money call optionsE) C) and D)
F) All of the above

Question 7

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will ________ and the value of Investor B's position will ________.

Accepted Answer

A)  increase; increase
B)  increase; decrease
C)  decrease; increase
D)  decrease; decreaseE) C) and D)
F) A) and B)

Question 8

An American put option gives its holder 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) A) and D)
F) All of the above

Question 9

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

Accepted Answer

A)  shorting the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price
B)  buying the underlying share, borrowing the present value of the exercise price and buying a put on the same underlying share and with the same exercise price
C)  buying the underlying share, borrowing the present value of the exercise price and writing a put on the same underlying share and with the same exercise price
D)  shorting the underlying share, lending the present value of the exercise price and buying a put on the same underlying share and with the same exercise priceE) All of the above
F) A) and C)

Question 10

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 ________.

Accepted Answer

A)  time spread
B)  long straddle
C)  short straddle
D)  money spreadE) A) and B)
F) A) and C)

Question 11

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

Accepted Answer

A)  Max(-C0, ST - X - C0) 
B)  Min(-C0, ST - X - C0) 
C)  Max(C0, ST - X + C0) 
D)  Max(0, ST - X - C0) E) C) and D)
F) B) and D)

Question 12

The value of a listed call option on a share is lower when ________.
I. the exercise price is higher
II. the contract approaches maturity
III. the share decreases in value
IV. a share 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) None of the above
F) A) and B)

Question 13

What combination of puts and calls can simulate a long stock investment?

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) A) and B)
F) None of the above

Question 14

The Black-Scholes hedge ratio for a long call option is equal to ________.

Accepted Answer

A)  N(d1) 
B)  N(d2) 
C)  N(d1)  - 1
D)  N(d2)  - 1E) B) and C)
F) None of the above

Question 15

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Accepted Answer

A)  Writing an uncovered call option
B)  Writing an uncovered put option
C)  Buying a call option
D)  Buying a put optionE) None of the above
F) A) and B)

Question 16

A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

Accepted Answer

A)  at the money
B)  in the money
C)  out of the money
D)  knocked outE) B) and D)
F) None of the above

Question 17

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM shares sell for $123 per share. You will realise a ________ on the investment.

Accepted Answer

A)  $200 profit
B)  $200 loss
C)  $300 profit
D)  $300 lossE) C) and D)
F) None of the above

Question 18

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of ________ and a time value of ________.

Accepted Answer

A)  $6.50; $0
B)  $5.00; $1.50
C)  $1.50; $5.00
D)  $0; $6.50E) A) and C)
F) B) and D)

Question 19

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

Accepted Answer

A)  price of the underlying asset
B)  risk-free rate of interest
C)  time to expiration
D)  variance of the underlying asset returnE) A) and B)
F) A) and C)

Question 20

Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model.
I. early exercise
II. changing expected returns of the share
III. time varying share price volatility

Accepted Answer

A)  II only
B)  I and III only
C)  II and III only
D)  I, II and IIIE) A) and B)
F) None of the above

Exam 14: Options and Risk Management

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 share price is ________ in August.

Correct Answer
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If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

Correct Answer
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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 ________.

Correct Answer
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The Black-Scholes hedge ratio for a long call option is equal to ________.

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

Correct Answer
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Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

Correct Answer
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What combination of puts and calls can simulate a long stock investment?

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 shares sell for $123 per share. You will realise a ________ on the investment.

Correct Answer
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Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will and the value of Investor B's position will .

Correct Answer
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Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

Correct Answer
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The value of a listed call option on a share is lower when ________. I. the exercise price is higher II. the contract approaches maturity III. the share decreases in value IV. a share split occurs

Correct Answer
verified

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

Correct Answer
verified

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

Correct Answer
verified

A European put option gives its holder the right to ________.

Correct Answer
verified

Correct Answer
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A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of and a time value of .

Correct Answer
verified

An American put option gives its holder the right to ________.

Correct Answer
verified

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Correct Answer
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Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I. early exercise II. changing expected returns of the share III. time varying share price volatility

Correct Answer
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A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

Correct Answer
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Exam 14: Options and Risk Management

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 share price is ________ in August.

Correct AnswerverifiedShow Answer

If you have an extremely 'bullish' outlook on the share market, you could attempt to maximise your rate of return by ________.

Correct AnswerverifiedShow Answer

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 ________.

Correct AnswerverifiedShow Answer

The Black-Scholes hedge ratio for a long call option is equal to ________.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Of the variables in the Black-Scholes OPM, the ________ is not directly observable.

Correct AnswerverifiedShow Answer

What combination of puts and calls can simulate a long stock investment?

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 shares sell for $123 per share. You will realise a ________ on the investment.

Correct AnswerverifiedShow Answer

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will ________ and the value of Investor B's position will ________.

Correct AnswerverifiedShow Answer

Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?

Correct AnswerverifiedShow Answer

The value of a listed call option on a share is lower when ________. I. the exercise price is higher II. the contract approaches maturity III. the share decreases in value IV. a share split occurs

Correct AnswerverifiedShow Answer

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by ________.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A European put option gives its holder the right to ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of ________ and a time value of ________.

Correct AnswerverifiedShow Answer

An American put option gives its holder the right to ________.

Correct AnswerverifiedShow Answer

________ is the most risky transaction to undertake in the share index option markets if the share market is expected to fall substantially after the transaction is completed.

Correct AnswerverifiedShow Answer

Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model. I. early exercise II. changing expected returns of the share III. time varying share price volatility

Correct AnswerverifiedShow Answer

A put option on Snapple Beverage has an exercise price of $30. The current share price of Snapple Beverage is $24.25. The put option is ________.

Correct AnswerverifiedShow Answer

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Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches the value of Investor A's position will and the value of Investor B's position will .

Correct Answer
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A 45 call option on a share priced at $50 is priced at $6.50. This call has an intrinsic value of and a time value of .

Correct Answer
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