Question 1

A call options gives its owner the right to buy stock at a fixed strike price during a specified period of time.

Accepted Answer

A) True 
 B)False

Question 2

If you write a put option, you acquire the right to buy stock at a fixed strike price.

Accepted Answer

A) True 
 B)False

Question 3

The owner of a regular exchange-listed call-option on the 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 4

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 5

If the volatility of the underlying asset decreases, then the:

Accepted Answer

A)   Value of the put option will increase, but the value of the call option will decrease
B)   Value of the put option will decrease, but the value of the call option will increase
C)   Value of both the put and call option will increase
D)   Value of both the put and call option will decrease

Question 6

The value of a put option at expiration is:

Accepted Answer

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)   the exercise price
D)   none of the above

Question 7

If the underlying stock pays a dividend before the expiration of the options that will have the following effect on the price of the options:
I. increase the value of the call option II)  increase the value of the put option
III. decrease the value of the call option
IV. decrease the value of the put option

Accepted Answer

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

Question 8

The value of an option (both call and put)  is positively related to:
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 9

If a put and call cost the same, how can an investor offset the cost of a buying a call?

Accepted Answer

A)   Borrowing money
B)   Sell a put
C)   Sell a stock
D)   Wait for the stock price to rise

Question 10

Figure-4 depicts the:

Accepted Answer

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

Question 11

Relative to the underlying stock, a call option always has:

Accepted Answer

A)   A higher beta and a higher standard deviation of return
B)   A lower beta and a higher standard deviation of return
C)   A higher beta and a lower standard deviation of return
D)   A lower beta and a lower standard deviation of return

Question 12

An increase in the exercise price results in an equal increase in the call option price.

Accepted Answer

A) True 
 B)False

Question 13

Firms regularly use the following to reduce risk:
I. Currency options
II. Interest-rate options
III. Commodity options

Accepted Answer

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

Question 14

The following are examples of disguised options for firms:
I. acquiring growth opportunities
II. ability of the firm to terminate a project when it is no longer profitable
III. options that are associated with corporate securities that provide flexibility to change the terms of the issues

Accepted Answer

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

Question 15

Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

Accepted Answer

A) True 
 B)False

Question 16

An European option gives its owner the right to exercise the option at any time before expiration.

Accepted Answer

A) True 
 B)False

Exam 20: Understanding Options

Correct Answer
verified

If the volatility of the underlying asset decreases, then the:

Correct Answer
verified

An increase in the exercise price results in an equal increase in the call option price.

Correct Answer
verified

A call options gives its owner the right to buy stock at a fixed strike price during a specified period of time.

Correct Answer
verified

Relative to the underlying stock, a call option always has:

Correct Answer
verified

Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

Correct Answer
verified

If you write a put option, you acquire the right to buy stock at a fixed strike price.

Correct Answer
verified

A put option gives the owner the right:

Correct Answer
verified

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

Correct Answer
verified

The following are examples of disguised options for firms: I. acquiring growth opportunities II. ability of the firm to terminate a project when it is no longer profitable III. options that are associated with corporate securities that provide flexibility to change the terms of the issues

Correct Answer
verified

Figure-4 depicts the:

Correct Answer
verified

The value of a put option at expiration is:

Correct Answer
verified

Firms regularly use the following to reduce risk: I. Currency options II. Interest-rate options III. Commodity options

Correct Answer
verified

If a put and call cost the same, how can an investor offset the cost of a buying a call?

Correct Answer
verified

An European option gives its owner the right to exercise the option at any time before expiration.

Correct Answer
verified

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

Correct Answer
verified

Exam 20: Understanding Options

Correct AnswerverifiedShow Answer

If the volatility of the underlying asset decreases, then the:

Correct AnswerverifiedShow Answer

An increase in the exercise price results in an equal increase in the call option price.

Correct AnswerverifiedShow Answer

A call options gives its owner the right to buy stock at a fixed strike price during a specified period of time.

Correct AnswerverifiedShow Answer

Relative to the underlying stock, a call option always has:

Correct AnswerverifiedShow Answer

Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

Correct AnswerverifiedShow Answer

If you write a put option, you acquire the right to buy stock at a fixed strike price.

Correct AnswerverifiedShow Answer

A put option gives the owner the right:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The following are examples of disguised options for firms: I. acquiring growth opportunities II. ability of the firm to terminate a project when it is no longer profitable III. options that are associated with corporate securities that provide flexibility to change the terms of the issues

Correct AnswerverifiedShow Answer

Figure-4 depicts the:

Correct AnswerverifiedShow Answer

The value of a put option at expiration is:

Correct AnswerverifiedShow Answer

Firms regularly use the following to reduce risk: I. Currency options II. Interest-rate options III. Commodity options

Correct AnswerverifiedShow Answer

If a put and call cost the same, how can an investor offset the cost of a buying a call?

Correct AnswerverifiedShow Answer

An European option gives its owner the right to exercise the option at any time before expiration.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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