Question 1

A call option has an exercise price of $150.At the option expiration date, the stock price could be either $100 or $200.Which investment would combine to give the same payoff as the stock?

Accepted Answer

A)  Lend PV of $100 and buy two calls.
B)  Lend PV of $100 and sell two calls.
C)  Borrow $100 and buy two calls.
D)  Borrow $100 and sell two calls.

Question 2

The value of any option (both call and put options)  is positively related to the

Accepted Answer

A)  volatility of the underlying stock price and time to expiration.
B)  time to expiration and risk-free rate.
C)  volatility of the underlying stock price and risk-free rate.
D)  risk-free rate.

Question 3

Put-call parity can be used to show

Accepted Answer

A)  how valuable in-the-money put options can get.
B)  how valuable in-the-money call options can get.
C)  the precise relationship between put and call option prices, given equal exercise prices and equal expiration dates.
D)  that the value of a call option is always twice that of a put, given equal exercise prices and equal expiration dates.

Question 4

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 5

The buyer of a call option has the right to exercise the option, but the writer of the call option has the

Accepted Answer

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.
D)  obligation to deliver a put option upon exercise.

Question 6

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 7

A profit diagram implicitly neglects the time value of money.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

For a European option: Value of call + PV(exercise price) = Value of put + Share price.

Accepted Answer

A) True 
 B)False

Question 10

The value of a call option increases as the volatility of the underlying stock price increases.

Accepted Answer

A) True 
 B)False

Question 11

In June 2017, an investor buys call options on Amgen stock with an exercise of price of $65 and expiring in January 2019.If the stock price in June 2018 is $60, then these options are

Accepted Answer

A)  in-the-money.
B)  out-of-the-money.
C)  a LEAPS option.
D)  out-of-the-money and a LEAPS option.

Question 12

In June 2017, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2019.If the stock price in July 2017 is $80, then this option is

Accepted Answer

A)  in-the-money.
B)  out-of-the-money.
C)  a LEAPS option.
D)  out-of-the-money and a LEAPS option.

Question 13

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

Accepted Answer

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

Question 14

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 15

Buying the stock and the put option on the stock provides the same payoff as

Accepted Answer

A)  investing the present value of the exercise price in T-bills and buying the call option on the stock.
B)  short-selling the stock and buying a call option on the stock.
C)  writing (selling)  a put option and buying a call option on the stock.
D)  a T-bill.

Question 16

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 17

The value of a call option is positively related to the following:

Accepted Answer

A)  underlying stock price.
B)  risk-free rate.
C)  time to expiration.
D)  underlying stock price, risk-free rate, time to expiration, and volatility of the underlying stock price.

Question 18

Suppose you buy a call and lend the present value of its exercise price.You could match the payoffs of this strategy by

Accepted Answer

A)  buying the underlying stock and selling a call.
B)  selling a put and lending the present value of the exercise price.
C)  buying the underlying stock and buying a put.
D)  buying the underlying stock and selling a put.

Question 19

Briefly explain what is meant by put-call parity.

Accepted Answer

The relationship between the value of a ...

Question 20

The owner of a regular exchange-listed put-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.

Exam 20: Understanding Options

The value of a call option is positively related to the following:

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

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A profit diagram implicitly neglects the time value of money.

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Put-call parity can be used to show

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The buyer of a call option has the right to exercise the option, but the writer of the call option has the

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

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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

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Buying the stock and the put option on the stock provides the same payoff as

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Relative to the underlying stock, a call option always has

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A call option has an exercise price of $150.At the option expiration date, the stock price could be either $100 or $200.Which investment would combine to give the same payoff as the stock?

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Briefly explain what is meant by put-call parity.

Correct AnswerverifiedThe relationship between the value of a ...View AnswerShow Answer

Suppose you buy a call and lend the present value of its exercise price.You could match the payoffs of this strategy by

Correct AnswerverifiedShow Answer

The value of any option (both call and put options) is positively related to the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The value of a call option increases as the volatility of the underlying stock price increases.

Correct AnswerverifiedShow Answer

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

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In June 2017, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2019.If the stock price in July 2017 is $80, then this option is

Correct AnswerverifiedShow Answer

For a European option: Value of call + PV(exercise price) = Value of put + Share price.

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

Correct AnswerverifiedShow Answer

In June 2017, an investor buys call options on Amgen stock with an exercise of price of $65 and expiring in January 2019.If the stock price in June 2018 is $60, then these options are

Correct AnswerverifiedShow Answer

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The relationship between the value of a ...
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