Question 1

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

Accepted Answer

A) True 
 B)False

Question 2

Explain the difference between a European option and an American option.

Accepted Answer

A European option may be exerc...

Question 3

A put option gives the owner the right:

Accepted Answer

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.

Question 4

All else equal,as the underlying stock price increases:

Accepted Answer

A)  the call price decreases.
B)  the call price increases.
C)  there is no effect on call price.
D)  the call price can either increase,decrease,or remain the same.

Question 5

Figure 2 depicts the:

Accepted Answer

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.

Question 6

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

Accepted Answer

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.

Question 7

The value of a call option is positively related to the following:
i.underlying stock price; II) risk-free rate; III) time to expiration; IV) volatility of the underlying stock price

Accepted Answer

A)  I only
B)  II only
C)  III only
D)  I,II,III,and IV

Question 8

Why would an option holder almost never exercise an option early?

Accepted Answer

Before expiration,the option value is al...

Question 9

The two principal options exchanges in the U.S.are the:
I.International Securities Exchange;
II.New York Stock Exchange;
III.NASDAQ;
IV.Chicago Board of Options Exchange

Accepted Answer

A)  II and III only
B)  I and II only
C)  I and IV only
D)  III and IV only

Question 10

The value of a call option is negatively related to the:
i.exercise price; II) risk-free rate; III) time to expiration

Accepted Answer

A)  I only
B)  II only
C)  III only
D)  II and III only

Question 11

Briefly explain what is meant by protective put.

Accepted Answer

The combination of a stock and a put opt...

Question 12

Call options can have a positive value at expiration even when the underlying stock is worthless.

Accepted Answer

A) True 
 B)False

Question 13

Buying a call option,investing the present value of the exercise price in T-bills,and short-selling the underlying share is the same as:

Accepted Answer

A)  buying a call and a put.
B)  buying a put and a share.
C)  buying a put.
D)  selling a call.

Question 14

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

Accepted Answer

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.

Question 15

All else equal,the closer an option gets to expiration,the lower the option price.

Accepted Answer

A) True 
 B)False

Question 16

For European options,the value of a call plus the present value of the exercise price is equal to:

Accepted Answer

A)  the value of a put minus the value of a share.
B)  the value of a share minus the value of a call.
C)  the value of a put plus the value of a share.
D)  the value of a share minus the value of a put.

Question 17

Buying an in-the-money option will almost always produce a profit.

Accepted Answer

A) True 
 B)False

Question 18

For European options,the value of a call minus the value of a put is equal to:

Accepted Answer

A)  the present value of the exercise price minus the value of a share
B)  the present value of the exercise price plus the value of a share
C)  the value of a share plus the present value of the exercise price
D)  the value of a share minus the present value of the exercise price

Question 19

The value of any option (both call and put options) is positively related to the:
i.volatility of the underlying stock price; II) time to expiration; III) risk-free rate

Accepted Answer

A)  I and II only
B)  II and III only
C)  I and III only
D)  III only

Question 20

An increase in the underlying stock price results in an increase in a call option's price.

Accepted Answer

A) True 
 B)False

Exam 20: Understanding Options

An increase in the underlying stock price results in an increase in a call option's price.

Correct AnswerverifiedShow Answer

Why would an option holder almost never exercise an option early?

Correct AnswerverifiedBefore expiration,the option value is al...View AnswerShow Answer

The value of a call option is positively related to the following: i.underlying stock price; II) risk-free rate; III) time to expiration; IV) volatility of the underlying stock price

Correct AnswerverifiedShow Answer

The two principal options exchanges in the U.S.are the: I.International Securities Exchange; II.New York Stock Exchange; III.NASDAQ; IV.Chicago Board of Options Exchange

Correct AnswerverifiedShow Answer

Figure 2 depicts the:

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For European options,the value of a call plus the present value of the exercise price is equal to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A put option gives the owner the right:

Correct AnswerverifiedShow Answer

Call options can have a positive value at expiration even when the underlying stock is worthless.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For European options,the value of a call minus the value of a put is equal to:

Correct AnswerverifiedShow Answer

Explain the difference between a European option and an American option.

Correct AnswerverifiedA European option may be exerc...View AnswerShow Answer

Buying an in-the-money option will almost always produce a profit.

Correct AnswerverifiedShow Answer

All else equal,the closer an option gets to expiration,the lower the option price.

Correct AnswerverifiedShow Answer

All else equal,as the underlying stock price increases:

Correct AnswerverifiedShow Answer

Buying a call option,investing the present value of the exercise price in T-bills,and short-selling the underlying share is the same as:

Correct AnswerverifiedShow Answer

The value of any option (both call and put options) is positively related to the: i.volatility of the underlying stock price; II) time to expiration; III) risk-free rate

Correct AnswerverifiedShow Answer

The value of a call option is negatively related to the: i.exercise price; II) risk-free rate; III) time to expiration

Correct AnswerverifiedShow Answer

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

Correct AnswerverifiedShow Answer

Briefly explain what is meant by protective put.

Correct AnswerverifiedThe combination of a stock and a put opt...View AnswerShow Answer

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Before expiration,the option value is al...
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A European option may be exerc...
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The combination of a stock and a put opt...
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