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Sample Questions Posted Below
CHAPTER 5: Options
MULTIPLE CHOICE
1.The seller (or the writer) of a call option:
| a. | has the right to buy the underlying asset at a strike price until an expiration date |
| b. | has the right to sell the underlying asset at a strike price until an expiration date |
| c. | may have the obligation to buy the underlying asset at a strike price until an expiration date |
| d. | may have the obligation to sell the underlying asset at a strike price until an expiration date |
| e. | None of these answers are correct. |
ANS: D DIF: Easy REF: 5.2 TOP: Options
MSC: Factual
2.The seller (or the writer) of a put option:
| a. | has the right to buy the underlying asset at a strike price until an expiration date |
| b. | has the right to sell the underlying asset at a strike price until an expiration date |
| c. | may have the obligation to buy the underlying asset at a strike price until an expiration date |
| d. | may have the obligation to sell the underlying asset at a strike price until an expiration date |
| e. | None of these answers are correct. |
ANS: C DIF: Easy REF: 5.2 TOP: Options
MSC: Factual
3.The distinction between American and European options is that:
| a. | American options trade in the United States, while European options trade in Europe |
| b. | American options can be exercised at any time until expiration, while European options can only be exercised at the time of expiration |
| c. | American options have a capped payoff, while European options traders can have unlimited profits or losses |
| d. | American options end in physical delivery of the underlying asset, while European options end in cash settlement |
| e. | None of these answers are correct. |
ANS: B DIF: Easy REF: 5.2 TOP: Options
MSC: Factual
4.When the stock price is greater than the strike price, a call is:
| a. | in-the-money |
| b. | at-the-money |
| c. | out-of-the money |
| d. | intrinsically at risk |
| e. | None of these answers are correct. |
ANS: A DIF: Easy REF: 5.3 TOP: Call Options
MSC: Factual
5.Compute the net profit or loss on the maturity date for a December 45 call for which the buyer paid a premium of $3.75 and the spot price at maturity is $49.25.
| a. | –$1 |
| b. | –$0.50 |
| c. | $0.50 |
| d. | $1 |
| e. | None of these answers are correct. |
ANS: C DIF: Easy REF: 5.3 TOP: Call Options
MSC: Applied
6.When the stock price is greater than the strike price, a put is:
| a. | in-the-money |
| b. | at-the-money |
| c. | out-of-the money |
| d. | intrinsically at risk |
| e. | None of these answers are correct. |
ANS: C DIF: Easy REF: 5.4 TOP: Put Options
MSC: Factual
7.The following option prices are given for YBM, whose stock price equals $99:
| Strike Price | Call Price | Put Price |
| 95 | 10.50 | 2.00 |
| 100 | 2.50 | 3.50 |
| 105 | 1.50 | 11.00 |
Which of the following statements is correct?
| a. | The intrinsic value for 95 call is $4 and for 105 put is $6. |
| b. | The intrinsic value for 95 call is $4.50 and for 100 put is $2. |
| c. | The intrinsic value for 100 call is $1 and for 95 put is $4. |
| d. | The intrinsic value for 105 call is 0 and for 105 put is $5. |
| e. | None of these answers are correct. |
ANS: A DIF: Moderate REF: 5.3 | 5.4 TOP: Call Options | Put Options
MSC: Applied
8.If S is the stock price on an option’s expiration date and K is the strike price, then a put seller’s (writer’s) payoff at expiration is:
| a. | max(0, S – K) |
| b. | min(0, K – S) |
| c. | max(0, K – S) |
| d. | min(0, S – K) |
| e. | None of these answers is correct. |
ANS: D DIF: Difficult REF: 5.3 | 5.4 TOP: Call Options | Put Options
MSC: Conceptual
9.BUG’s stock price is $53 and its put price is $4.50 for a strike price of $55. This put option’s intrinsic value is:
| a. | $2 |
| b. | $2.50 |
| c. | $3 |
| d. | $4 |
| e. | None of these answers are correct. |
ANS: A DIF: Easy REF: 5.4 TOP: Put Options
MSC: Applied
10.The maximum loss that a writer of a naked put can incur is:
| a. | 0 |
| b. | the stock price |
| c. | unlimited |
| d. | the strike price |
| e. | None of these answers are correct. |
ANS: D DIF: Easy REF: 5.4 TOP: Put Options
MSC: Applied
11.A short put is a:
| a. | bullish strategy |
| b. | bearish strategy |
| c. | neutral market strategy |
| d. | bet on volatility |
| e. | None of these answers are correct. |
ANS: A DIF: Moderate REF: 5.4 TOP: Put Options
MSC: Conceptual
12.Suppose you go both long a call option and short a put option. Both options are on the same underlying stock and have the same strike price and expiration date. You have created:
| a. | a short forward |
| b. | a long forward |
| c. | a long futures |
| d. | a short futures |
| e. | None of these answers are correct. |
ANS: B DIF: Easy REF: 5.3 | 5.4 TOP: Call Options | Put Options
MSC: Applied
13.The primary function of the Options Clearing Corporation (OCC) is to:
| a. | regulate all options markets |
| b. | act as a clearinghouse for a majority of exchange-traded options |
| c. | regulate all futures markets |
| d. | act as a clearinghouse for all exchange-traded derivative contracts |
| e. | None of these answers are correct. |
ANS: B DIF: Easy REF: 5.5 TOP: Exchange-Traded Options
MSC: Factual
14.The following contracts have daily settlements:
| a. | forward contracts |
| b. | futures contracts |
| c. | exchange-traded options |
| d. | options on futures |
| e. | over-the-counter options |
ANS: B DIF: Moderate REF: 5.5 TOP: Exchange-Traded Options
MSC: Factual
15.Suppose that you find that YBM’s October 100 put has an ask price of $4.10 and a bid price of $4.00. If you want to buy these put options to protect your holding of 400 YBM shares from declining, what is your total cost including commission? Assume that the broker charges a commission equal to a flat fee of $15 plus $2 per contract.
| a. | $1,623 |
| b. | $1,647 |
| c. | $1,655 |
| d. | $1,663 |
| e. | None of these answers are correct. |
ANS: D DIF: Moderate REF: 5.5 TOP: Exchange-Traded Options
MSC: Applied
16.Suppose that a dealer is quoting an ask/offer price $50.10 and bid price $50.00 for BUG stock. You would like to sell your holdings of 6,000 BUG shares at a price of $55 or something close to it. To really ensure that the sell goes through, you should place:
| a. | a market order at $55 |
| b. | a limit sell order at $55 |
| c. | a market-if-touched sell order at $55 |
| d. | a stop-loss sell order at $55 |
| e. | None of these answers are correct. |
ANS: C DIF: Moderate REF: 5.7 TOP: Order Placement Strategies
MSC: Applied
17.A stop-loss order (or a sell stop order):
| a. | becomes a market order as soon as a trade takes place at this price, which is higher than the current market price |
| b. | is a limit sell order above the current market price |
| c. | is a sell order placed at the ongoing current ask price |
| d. | is a sell order placed at a price lower than the current bid price |
| e. | None of these answers are correct. |
ANS: D DIF: Moderate REF: 5.7 TOP: Order Placement Strategies
MSC: Conceptual
18.An order to buy a put option with a strike price of $100 and simultaneously sell a put option with a strike price of $105 is an example of:
| a. | a scale order |
| b. | a spread order |
| c. | a one cancels the other order |
| d. | a switch order |
| e. | None of these answers are correct. |
ANS: B DIF: Moderate REF: 5.7 TOP: Order Placement Strategies
MSC: Conceptual
19.The current price of platinum is $1,800 per ounce. You are expecting that in three months the price of platinum will rise above $1,900. You are also worried that there is a small chance platinum’s price may fall below $1,700. If you are setting up speculative strategies based on your views, you are unlikely to use which of the following strategies?
| a. | Buy platinum in the spot market, and place a stop-loss order at $1,700 or a little below. |
| b. | Buy call options on platinum. |
| c. | Buy call options on platinum futures. |
| d. | Buy platinum in the spot market and protect against the downside by buying put options or put options on platinum futures. |
| e. | Buy platinum futures. |
ANS: E DIF: Moderate REF: 5.7 TOP: Order Placement Strategies
MSC: Applied
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