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1.

A transaction in which an investor holds a position in the spot


market and sells a futures contract or writes a call is (Points :1)
a gamble
a speculative position
a hedge
a risk-free transaction
none of the above

2. Which of the following are advantages of derivatives? (Points :1)


lower transaction costs than securities and commodities
reveal information about expected prices and volatility
help control risk
make spot prices stay closer to their true values
all of the above

3. A forward contract has which of the following characteristics?


(Points :1)
has a buyer and a seller
trades on an organized exchange
has a daily settlement
gives the right but not the obligation to buy
all of the above

4. Options on futures are also known as (Points :1)


spot options
commodity options
exchange options
security options
none of the above

5. A market in which the price equals the true economic value (Points
:1)
is risk-free
has high expected returns
is organized
is efficient
all of the above

6. Which of the following trade on organized exchanges? (Points :1)


caps
forwards
options
swaps
none of the above

7. Which of the following markets is/are said to provide price


discovery? (Points :1)
futures
forwards
options
a and b
b and c

8. Investors who do not consider risk in their decisions are said to be


(Points :1)
speculating
short selling
risk neutral
traders
none of the above

9. Which of the following statements is not true about the law of one
price (Points :1)
investors prefer more wealth to less
investments that offer the same return in all states must pay
the risk-free rate
if two investment opportunities offer equivalent outcomes,
they must have the same price
investors are risk neutral
none of the above

10. Which of the following contracts obligates a buyer to buy or sell


something at a later date? (Points :1)
call
futures
cap
put
swaption

11. A call option priced at $2 with a stock price of $30 and an exercise
price of $35 allows the holder to buy the stock at (Points :1)
$2
$32
$33
$35
none of the above

12. A put option in which the stock price is $60 and the exercise price
is $65 is said to be (Points :1)
in-the-money
out-of-the-money
at-the-money
exercisable
none of the above
13. Organized options markets are different from over-the-counter
options markets for all of the following reasons except (Points :1)
exercise terms
physical trading floor
regulation
standardized contracts
credit risk

14. The number of options acquired when one contract is purchased


on an exchange is (Points :1)
1
5
100
500
8,000

15. The advantages of the over-the-counter options market include all


of the following except (Points :1)
customized contracts
privately executed
freedom from government regulation
lower prices
none of the above

16. Which one of the following is not a type of transaction cost in


options trading? (Points :1)
the bid-ask spread
the commission
clearing fees
the cost of obtaining a quote
all of the above
17. If the market maker will buy at 4 and sell at 4.50, the bid-ask
spread is (Points :1)
8.50
4.25
0.50
4.00
none of the above

18. Which of the following is a legitimate type of option order on the


exchange? (Points :1)
purchase order
limit order
execution order
floor order
all of the above

19. The exercise price can be set at any desired level on each of the
following types of options except (Points :1)
FLEX options
equity options
over-the-counter options
all of the above
none of the above

20. An investor who owns a call option can close out the position by
any of the following types of transactions except (Points :1)
exercise
offset
expiring out-of-the-money
buying a put
none of the above
21. Which type of trader legitimately practices dual trading? (Points
:1)
floor brokers
off-floor option traders
board brokers
designated primary market makers
none of the above

22. The option price is also referred to as the (Points :1)


strike
spread
premium
fee
none of the above

23. Index options trading on organized exchanges expire according to


which of the following cycles? (Points :1)
March, June, September, and December
each of the next four consecutive months
the current month, the next month, and the next two months
in one of the other cycles
every other month for each of the next nine months
none of the above

24. An investor who exercises a call option on an index must (Points


:1)
accept the cash difference between the index and the exercise
price
purchase all of the stocks in the index in their appropriate
proportions from the writer
immediately buy a put option to offset the call option
immediately write another call option to offset
none of the above
25. Which of the following are long-term options? (Points :1)
Bond options
LEAPS
currency options
Nikkei put warrants
none of the above

26. The exchange with the largest share of the options market is the
(Points :1)
American Stock Exchange
Boston Options Exchange
Chicago Board Options Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange

27. A writer selected to exercise an option is said to be (Points :1)


marginal
assigned
restricted
designated
none of the above

28. All of the following are forms of options except (Points :1)
convertible bonds
callable bonds
warrants
mutual funds
none of the above

29. Which of the following index options is the most widely traded?
(Points :1)
S&P 500
Nikkei 225
Technology Index
New York Stock Exchange Index
none of the above

30.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.
Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the intrinsic value of the December 115 put? (Points :1)
1.75
0.00
3.90
3.00
none of the above

31.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the intrinsic value of the November 105 put? (Points :1)
0.30
8.25
8.50
0.00
none of the above

32.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the intrinsic value of the January 110 call? (Points :1)
0.00
8.30
3.75
5.00
none of the above
33.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the intrinsic value of the November 115 call? (Points :1)
1.50
0.00
2.80
1.75
none of the above

34.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated
What is the time value of the December 105 put? (Points :1)
1.30
8.30
0.00
7.00
none of the above

35.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the time value of the November 115 put? (Points :1)
1.75
2.80
1.10
0.00
none of the above

36.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.
Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the time value of the November 110 call? (Points :1)
0.00
4.40
1.15
3.25
none of the above

37.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the time value of the January 115 call? (Points :1)
5.30
0.00
3.50
1.70
none of the above

38.
The following quotes were observed for options on a given stock on November 1 of a
given year. These are American calls except where indicated. Use the information
to answer questions 30 through 38.

Calls Puts
Strike Nov Dec Jan Nov Dec Jan
105 8.4 10 11.5 5.3 1.3 2
110 4.4 7.1 8.3 0.9 2.5 3.8
115 1.5 3.9 5.3 2.8 4.8 4.8

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were
0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no
dividends unless indicated

What is the European lower bound of the December 105 call? (Points
:1)
9.86
0.00
8.25
9.26
none of the above

39. The time value of an option is also referred to as the (Points :1)
synthetic value
strike value
speculative value
parity value
none of the above
40. Which of the following is the lowest possible value of an American
call on a stock with no dividends? (Points :1)
Max(0, S0 - X(1 + r)-T)
S0
Max(0, S0 - X)
Max(0, S0 (1 + r)-T - X)
none of the above

41. Which of the following is the lowest possible value of an American


put on a stock with no dividends? (Points :1)
X(1 + r)-T
X
Max(0, X(1 + r)-T - S0)
Max(0, X - S0)
none of the above

42. The difference between a Treasury bill's face value and its price is
called the (Points :1)
time value
discount
coupon rate
bid
none of the above

43. Which of the following statements about an American call is not


true? (Points :1)
Its time value decreases as expiration approaches
Its maximum value is the stock price
It can be exercised prior to expiration
It pays dividends
none of the above
44. When puts are priced with the binomial model, which of the
following is true? (Points :1)
the puts must be American
the puts cannot be properly hedged
the puts will violate put-call parity
the hedge ratio is one throughout the tree
none of the above

45. If the binomial model is extended to multiple periods for a fixed


option life, which of the following adjustments must be made? (Points
:1)
the up and down factors must be increased
the risk-free rate must be increased
the up and down factors and the risk-free rate must be
decreased
the initial stock price must be proportionately reduced
none of the above

46. Which of the following are not path-dependent options when the
stock pays a constant dividend yield? (Points :1)
European calls and European puts
European calls and American puts
American puts and European puts
American puts and European calls
none of the above

47. In a non-recombining tree, the number of paths that will occur


after three periods is (Points :1)
three
four
ten
eight
six
48. When the number of time periods in a binomial model is large, a
European call option value does what? (Points :1)
fluctuates around its intrinsic value
converges to a specific value
increases without limit
converges to the European lower bound
none of the above

49. When the number of time periods in a binomial model is large,


what happens to the binomial probability of an up move? (Points :1)
it approaches 1.0
it approaches zero
it fluctuates without pattern
it converges to 0.5
none of the above

50.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a one-period world. Answer questions 50 through
53 about a call with an exercise price of 80.

What would be the call's price if the stock goes up? (Points :1)
3.60
8.00
5.71
4.39
none of the above

51.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a one-period world. Answer questions 50 through
53 about a call with an exercise price of 80.

What would be the call's price if the stock goes down? (Points :1)
8.00
3.60
0.00
9.00
none of the above

52.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a one-period world. Answer questions 50 through
53 about a call with an exercise price of 80.

What is the hedge ratio? (Points :1)


0.429
0.714
0.571
0.823
none of the above

53.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a one-period world. Answer questions 50 through
53 about a call with an exercise price of 80.

What is the theoretical value of the call? (Points :1)


8.00
4.39
5.15
5.36
none of the above

54.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a two-period world. Answer questions 54 through
56 about a call with an exercise price of 80.

What is the value of the call if the stock goes up, then down? (Points
:1)
0.96
16.80
8.00
0.00
none of the above

55.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a two-period world. Answer questions 54 through
56 about a call with an exercise price of 80.

What is the hedge ratio if the stock goes down one period? (Points :1)
0.00
0.0725
1.00
0.73
none of the above

56.
Consider a binomial world in which the current stock price of 80 can
either go up by 10 percent or down by 8 percent. The risk-free rate is
4 percent. Assume a two-period world. Answer questions 54 through
56 about a call with an exercise price of 80.

What is the current value of the call? (Points :1)

8.00

7.30

11.13

0.619

none of the above

57. In the binomial model, if an option has no chance of expiring out-

of-the-money, the hedge ratio will be (Points :1)

0.5

infinite

none of the above


58. Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22

and there is one period left in an American call's life. What will the

option be worth? (Points :1)

6.83

0.00

4.56

5.00

none of the above

59. In a one-period binomial model with Su = 49.5, Sd = 40.5, p =

0.8, r = 0.06, S = 45 and X = 50, what is a European put worth?

(Points :1)

2.17

0.50

9.50

5.00

none of the above


60. Which of the following statements about the binomial model is

incorrect? (Points :1)

it converges to the Black-Scholes-Merton model

it can accommodate early exercise

it allows only two stock prices at expiration

it can be extended to a large number of time periods

none of the above