Exercises

1) An option that can be exercised any time before its expiration date is called:
A) a European option.
B) an American option.
C) a call option.
D) a put option.

Answer: B

2) The owner of a regular exchange-listed call-option on a stock

A) has the right to buy 100 shares of the underlying stock at the exercise price.
B) has the right to sell 100 shares of the underlying stock at the exercise price.
C) has the obligation to buy 100 shares of the underlying stock at the exercise price.
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Answer: A

3) The owner of a regular exchange-listed put-option on a stock

A) has the right to buy 100 shares of the underlying stock at the exercise price.
B) has the right to sell 100 shares of the underlying stock at the exercise price.
C) has the obligation to buy 100 shares of the underlying stock at the exercise price.
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Answer: B

4) From a geometric viewpoint, how is the position diagram for a put option related to the diagram
of a call option on the same stock having the same exercise price and maturity?
A) The inverse of the call diagram
B) Unrelated to the call diagram no matter what the exercise price
C) The mirror image of the call diagram, reflected around the exercise price
D) Exactly the same as the call diagram for the given exercise price

Answer: C

5) A put option gives the owner the right

A) and the obligation to buy an asset at a given price.
B) and the obligation to sell an asset at a given price.
C) but not the obligation to buy an asset at a given price.
D) but not the obligation to sell an asset at a given price.

Answer: D

6) The buyer of a call option has the right to exercise the option, but the writer of the call option has
the
A) choice to offset with a put option upon exercise.
B) obligation to deliver the shares at the exercise price.
C) choice to deliver shares or take a cash payoff.
1
D) obligation to deliver a put option upon exercise.

Answer: B

7) Suppose an investor sells (writes) a put option. What will happen if the stock price on the
exercise date exceeds the exercise price?
A) The seller will need to deliver stock to the owner of the option.
B) The seller will be obliged to buy stock from the owner of the option.
C) The owner will not exercise the option.
D) The option will extend for nine more months.

Answer: C

8) The writer (seller) of a regular exchange-listed call-option on a stock

A) has the right to buy 100 shares of the underlying stock at the exercise price.
B) has the right to sell 100 shares of the underlying stock at the exercise price.
C) has the obligation to buy 100 shares of the underlying stock at the exercise price.
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Answer: D

9) The writer (seller) of a regular exchange-listed put-option on a stock

A) has the right to buy 100 shares of the underlying stock at the exercise price.
B) has the right to sell 100 shares of the underlying stock at the exercise price.
C) has the obligation to buy 100 shares of the underlying stock at the exercise price.
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Answer: C

10) The value of a put option at expiration equals the

A) market price of the share minus the exercise price.
B) higher of the exercise price minus market price of the share and zero.
C) exercise price.
D) share price.

Answer: B

11) Figure 1 depicts the

A) position diagram for the buyer of a call option.

B) profit diagram for the buyer of a call option.
2
C) position diagram for the buyer of a put option.
D) profit diagram for the buyer of a put option.

Answer: B

12) Figure 2 depicts the

A) position diagram for the buyer of a call option.

B) profit diagram for the buyer of a call option.
C) position diagram for the buyer of a put option.
D) profit diagram for the buyer of a put option.

Answer: D

13) Figure 3 depicts the

A) position diagram for the writer (seller) of a call option.

B) profit diagram for the writer (seller) of a call option.
C) position diagram for the writer (seller) of a put option.
D) profit diagram for the writer (seller) of a put option.

Answer: D

14) Figure 4 depicts the

3
A) position diagram for the writer (seller) of a call option.
B) profit diagram for the writer (seller) of a call option.
C) position diagram for the writer (seller) of a put option.
D) profit diagram for the writer (seller) of a put option.

Answer: A

15) Suppose an investor buys one share of stock and a put option on the stock. What will be the
value of her investment on the final exercise date if the stock price is below the exercise price?
(Ignore transaction costs.)
A) The value of two shares of stock.
B) The value of one share of stock plus the exercise price.
C) The exercise price.
D) The value of one share of stock minus the exercise price.

Answer: C

16) Which of the following investors would be happy to see the stock price rise sharply?

I) An investor who owns the stock and a put option;

II) An investor who has sold a put option and bought a call option;
III) correct for projects that have average risk compared to the firm's other assets. An investor who
owns the stock and has sold a call option
IV) An investor who has sold a call option
A) I and II only
B) III and IV only
C) III only
D) IV only

Answer: A