Chapter 15 - Options Markets

15
1.
You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration
date when IBM stock sells for $123 per share. You will realize a ______ on the investment.
A.
B.
C.
D.
2.
You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration
A.
B.
C.
D.
3.
$300 profit
$200 loss
$600 loss
$200 profit
A(n) ______ option can only be exercised on the expiration date.

A.
B.
C.
D.
6.
$300 profit
$300 loss
$500 loss
$200 profit
You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration
A.
B.
C.
D.
5.
$200 profit
$200 loss
$500 profit
$500 loss
You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration
A.
B.
C.
D.
4.
$200 profit
$200 loss
$300 profit
$300 loss
Mexican
Asian
American
European
All else the same, an ______ style option will be ______ valuable than a ______ style option.
A.
B.
C.
D.
American, more, European

American, less, European
American, more, Canadian
American, less, Canadian
7.
At contract maturity the value of a call option is ___________ where X equals the option's strike price and
ST is the stock price at contract expiration.
A.
B.
C.
D.
8.
At contract maturity the value of a put option is ___________ where X equals the option's strike price and
ST is the stock price at contract expiration.
A.
B.
C.
D.
9.
Max(0, ST - X)
Min(0, ST - X)
Max(0, X - ST)
Min(0, X - ST)
Max(0, ST - X)
Min(0, ST - X)
Max(0, X - ST)
Min(0, X - ST)
An American put option gives its holder the right to _________.

A.
B.
C.
D.
buy the underlying asset at the exercise price on or before the expiration date
buy the underlying asset at the exercise price only at the expiration date
sell the underlying asset at the exercise price on or before the expiration date
sell the underlying asset at the exercise price only at the expiration date
10. An Asian call option gives its holder the right to ____________.
A. buy the underlying asset at the exercise price on or before the expiration date
B. buy the underlying asset at a price determined by the average stock price during some specified portion
of the option's life
C. sell the underlying asset at the exercise price on or before the expiration date
D. sell the underlying asset at a price determined by the average stock price during some specified portion
11. An Asian put option gives its holder the right to ____________.
B. buy the underlying asset at a price determined by the average stock price during some specified portion
D. sell the underlying asset at a price determined by the average stock price during some specified portion
12. A down-and-out option _______________.
A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the
beginning of the option term
B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of
the option
C. expires worthless if the firm's stock price falls below some specified percentage of what it was at the
D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of
the option
13. A down-and-in option _______________.

A.provides a payoff if the firm's stock price falls below some specified percentage of what it was at the
B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of
the option
the option
14. A quanto provides its holder with ______________.
A. the right to participate in the payoffs from a portfolio of gambling casino stocks
B. the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
C. the right to participate in the investment performance of a foreign security
D. the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate
15. You purchase a call option on a stock. The profit at contract maturity of the option position is ___________
where X equals the option's strike price, ST is the stock price at contract expiration and C0 is the original
purchase price of the option.
A.
B.
C.
D.
Max(-C0, ST - X - C0)
Min(-C0, ST - X - C0)
Max(C0, ST - X + C0)
Max(0, ST - X - C0)
16. A lookback option provides its holder with _______________.

A. a payoff determined by either the maximum or minimum price of the underlying stock during the life of
the option
B.a payoff determined by the difference between the maximum and minimum price of the underlying stock
during the life of the option
C. a payoff if the firm's stock price falls below some specified dollar amount during the term of the option
D. a payoff based on the average price of the underlying stock over the life of the option
17. You write a put option on a stock. The profit at contract maturity of the option position is ___________
where X equals the option's strike price, ST is the stock price at contract expiration and P0 is the original
premium of the put option.
A.
B.
C.
D.
Max(P0, X - ST - P0)
Min(-P0, X - ST - P0)
Min(P0, ST - X + P0)
Max(0, ST - X - P0)
18. Longer term American style options with maturities of up to three years are called __________.
A.
B.
C.
D.
warrants
LEAPS
GICs
CATs
19. The initial maturities of most exchange traded options are generally __________.
A.
B.
C.
D.
less than a year

less than 2 years
between 1 and 2 years
20. A futures call option provides its holder with the right to ___________.
A.
B.
C.
D.
purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock
purchase a futures contract at a specified price for a specified period of time
deliver a futures contract and receive a specified price at a specific date in the future
21. Exchange traded stock options expire on the _______________ of the expiration month.
A.
B.
C.
D.
second Monday
third Wednesday
second Thursday
third Friday
22. The writer of a put option _______________.

A.
B.
C.
D.
agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires
has the right to buy shares at a set price
has the right to sell shares at a set price
23. Advantages of exchange traded options over OTC options include all but which one of the following?
A.
B.
C.
D.
Ease and low cost of trading

Anonymity of participants
Contracts that are tailored to meet the needs of market participants
No concerns about counterparty credit risk
24. Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.
A.
B.
C.
D.
1
10
100
1,000
25. Exercise prices for listed stock options usually occur in increments of ____, and bracket the current stock
price.
A.
B.
C.
D.
$1
$5
$20
$25
26. You buy a call option and a put option on General Electric. Both the call option and the put option have the
same exercise price and expiration date. This strategy is called a _________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
27. In 1973, trading of standardized options on a national exchange started on the _________.
A.
B.
C.
D.
AMEX
CBOE
NYSE
CFTC
28. An American call option gives the buyer the right to _________.
A.
B.
C.
D.
29. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple
Beverage is $24.25. The put option is _________.
A.
B.
C.
D.
at the money
in the money
out of the money
knocked out
30. You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and
write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is
called a ________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
31. A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst
Corp. is $32. The call option is _________.
A.
B.
C.
D.
at the money
in the money
out of the money
knocked in
32. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a
_________.
A.
B.
C.
D.
covered call
long straddle
naked call
money spread
33. You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September
and write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October.
This strategy is called a _________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
34. A European call option gives the buyer the right to _________.
A.
B.
C.
D.
35. You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is
called a _________.
A.
B.
C.
D.
long straddle
naked put
protective put
short stroll
36. The value of a listed call option on a stock is lower when _______________.
I. the exercise price is higher
II. the contract approaches maturity
III. the stock decreases in value
IV. a stock split occurs
A.
B.
C.
D.
II, III and IV only

I, III and IV only
I, II and III only
I, II, III and IV
37. The Option Clearing Corporation is owned by _________.

A.
B.
C.
D.
the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation
the Federal Reserve system
major U.S. banks
38. The value of a listed put option on a stock is lower when _______________.
A.
B.
C.
D.
II only
II and IV only
I, II and III only
I, II, III and IV
39. The maximum loss a buyer of a stock call option can suffer is the _________.
A.
B.
C.
D.
call premium
stock price
stock price minus the value of the call
strike price minus the stock price
40. Which one of the statements about margin requirements on option positions is not correct?
A. The margin required will be higher if the option is in the money.
B. If the required margin exceeds the posted margin the option writer will receive a margin call.
C. A buyer of a put or call option does not have to post margin.
D. Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in
cash.
41. A European put option gives its holder the right to _________.
A.
B.
C.
D.
42. The potential loss for a writer of a naked call option on a stock is _________.
A.
B.
C.
D.
equal to the call premium

larger the lower the stock price
limited
unlimited
43. A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put
option will want the value of the underlying asset to _________.
A.
B.
C.
D.
decrease, decrease
decrease, increase
increase, decrease
increase, increase
44. Buyers of listed options __________ required to post margins and writers of naked listed options
__________ required to post margins.
A.
B.
C.
D.
are; are not

are; are
are not; are
are not; are not
45. An option with a payoff that depends on the average price of the underlying asset during at least some
portion of the life of the option is called an ______ option.
A.
B.
C.
D.
American
European
Asian
Australian
46. A down-and-out option is one type of ________ option.

A.
B.
C.
D.
barrier
lookback
digital
Asian
47. A "bet" option is also called a ____ option.

A.
B.
C.
D.
barrier
lookback
digital
foreign exchange
48. Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?
A.
B.
C.
D.
SPX
DJX
CME
OEX
49. The September 14, 2009 price quotation for a Boeing call option with a strike price of $50 due to expire in
November is $3.50 while the stock price of Boeing is $51. The premium on one Boeing November 50 call
contract is _________.
A.
B.
C.
D.
$1
$2.50
$250.00
$350.00
50. You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you
could gain from this strategy is _________.
A.
B.
C.
D.
$120
$1,000
$11,000
$12,000
51. You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract.
The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position is
_________.
A.
B.
C.
D.
$125
$450
$575
unlimited
52. You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract.
The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off __________ in August.
A.
B.
C.
D.
only if the stock price is either lower than $44.25 or higher than $55.75
only if the stock price is between $44.25 and $55.75
only if the stock price is higher than $55.75
only if the stock price is lower than $44.25
53. Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas
Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments
stock is $79, your profit would be _________.
A.
B.
C.
D.
$150
$400
$600
$1,850
54. __________ is the most risky transaction to undertake in the stock index option markets if the stock market
is expected to fall substantially after the transaction is completed.
A.
B.
C.
D.
Writing an uncovered call option

Writing an uncovered put option
Buying a call option
Buying a put option
55. Which one of the following is a correct statement?

A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options
does not.
B. A convertible bond consists of a straight bond plus a specified number of detachable warrants.
C. Call options always have an initial maturity greater than one year while warrants have an initial maturity
less than one year.
D. Call options may be convertible into the stock while warrants are not convertible into the stock.
56. A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of
$35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and
the maximum per share gain to the writer of an uncovered call is _________.
A.
B.
C.
D.
$33.00; $3.50
$33.00; $31.50
$35.00; $3.50
$35.00; $35.00
You are cautiously bullish on the common stock of the Wildwood Corporation over the next several
months. The current price of the stock is $50 per share. You want to establish a bullish money spread to
help limit the cost of your option position. You find the following option quotes:
57. To establish a bull money spread with calls you would _______________.
A.
B.
C.
D.
buy the 55 call and sell the 45 call

buy the 45 call and buy the 55 call
sell the 45 call and sell the 55 call
58. Ignoring commissions, the cost to establish the bull money spread with calls would be _______.
A.
B.
C.
D.
$1,050
$650
$400
$400 income rather than cost
59. If in June the stock price is $53 your net profit on the bull money spread would be ________.
A.
B.
C.
D.
$300
-$400
$150
$50
60. To establish a bull money spread with puts you would _______________.
A.
B.
C.
D.
sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put
buy the 55 put and sell the 45 put
sell the 45 put and sell the 55 put
61. Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52.
Ignoring commissions the net profit on your position is __.
A.
B.
C.
D.
$500
$700
$200
$250
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share
for months, and you believe it is going to stay in that range for the next three months. The price of a threemonth put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise
price sells for $4.
62. What would be a simple options strategy using a put and a call to exploit your conviction about the stock
price's future movement?
A.
B.
C.
D.
Sell a call
Purchase a put
Sell a straddle
Buy a straddle
63. Selling a straddle would generate total premium income of _____.

A.
B.
C.
D.
$300
$400
$500
$700
64. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net
profit on the strap?
A.
B.
C.
D.
$200
$300
$700
$400
65. How can you create a position involving a put, a call, and riskless lending that would have the same payoff
structure as the stock at expiration?
A.
B.
C.
D.
Buy the call, sell the put; lend the present value of $40
Sell the call, buy the put; lend the present value of $40
Buy the call, sell the put; borrow the present value of $40
Sell the call, buy the put; borrow the present value of $40
66. A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10%
over the next three months. You believe there is a 30% chance the stock will drop by 5% and you think
there is only a 10% chance of a major drop in price of 20%. At the money 3 month puts are available at a
cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of three
months?
A.
B.
C.
D.
$300
$200
$475
$0
67. A covered call strategy benefits from what environment?

A.
B.
C.
D.
Falling interest rates

Price stability
Price volatility
Unexpected events
68. If you combine a long stock position with buying an at the money put option the resulting net payoff profile
will resemble the payoff profile of a _______.
A.
B.
C.
D.
long call
short call
short put
long put
69. Which strategy benefits from upside price movement and has some protection should the price of the
security fall?
A.
B.
C.
D.
Bull spread
Long put
Short call
Straddle
70. What combination of puts and calls can simulate a long stock investment?
A.
B.
C.
D.
Long call and short put

Long call and long put
Short call and short put
Short call and long put
71. An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current stock
price is $35.10, what is the break even point for the investor?
A.
B.
C.
D.
$32.50
$35.00
$37.50
$37.60
72. An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring
commissions, if the option was purchased for a price of $0.85, what is the break even point for the
investor?
A.
B.
C.
D.
$24.15
$25.00
$25.87
$27.86
73. Which of the following strategies makes a profit if the stock price stays stable?
A.
B.
C.
D.

74. Which of the following strategies makes a profit if the stock price declines and loses money when the stock
price increases?
A.
B.
C.
D.

75. If you combine a long stock position with selling an at the money call option the resulting net payoff profile
will resemble the payoff profile of a _______.
A.
B.
C.
D.
long call
short call
short put
long put
76. What strategy could be considered insurance for an investment in a portfolio of stocks?
A.
B.
C.
D.
Covered call
Protective put
Short put
Straddle
77. What strategy is designed to ensure a value within the bounds of two different stock prices?
A.
B.
C.
D.
Collar
Covered Call
Protective put
Straddle
78. You are convinced that a stock's price will move by at least 15% over the next three months. You are not
sure which way the price will move, but you believe that the results of a patent hearing are definitely going
to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one
of the following options strategies best fits this scenario?
A.
B.
C.
D.
Buy a strip
Buy a strap
Buy a straddle
Write a straddle
79. When issued most convertible bonds are issued _____________.

A.
B.
C.
D.
deep in the money

deep out of the money
slightly out of the money
slightly in the money
80. A convertible bond is deep in the money. This means the bond price will closely track the __________.
A.
B.
C.
D.
straight debt value of the bond

conversion value of the bond
straight debt value of the bond minus the conversion value
straight debt value of the bond plus the conversion value
81. Warrants differ from listed options in that ________.

I. exercise of warrants results in dilution of a firm's earnings per share
II. when warrants are exercised new shares of stock must be created
III. warrant exercise result in cash flows to the firm whereas exercise of listed options does not
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
82. Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock
and Bond B is not. Bond A is priced at $1,245 and Bond B is priced at $1,120. Bond A has a promised
yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%. The stock of Bond A is
trading at $49.80 per share. Which of the following statements is/are correct?
I. The value of the conversion option for Bond A is $125.
II. The lower promised yield to maturity of Bond A indicates that the bond is priced according to its
straight debt value rather than its conversion value.
III. Bond A can be converted into 25 shares of stock.
A.
B.
C.
D.
II only
I and III only
III only
I, II and III
83. You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000
jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The
option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost
of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and
jobless claims actually wind up at 303,000 your net profit on the position is ______.
A.
B.
C.
D.
-$15
$200
$85
$185
84. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this
year due to tax reasons but he is concerned the stock will drop in value before year end. Bill wants to use
a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January
call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are
quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net
position value including the option profit or loss and the stock is _________.
A.
B.
C.
D.
$195,000
$220,000
$175,000
$215,000
85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are
ready to sell so you are considering purchasing either at the money or out of the money puts. If you decide
to purchase the out of the money puts your maximum loss is __________ than if you buy at the money puts
and your maximum gain is __________.
A.
B.
C.
D.
greater; lower
greater; greater
lower; greater
lower; lower
86. You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2 for 1 split prior to the
expiration date. You hold the option until the expiration date when IBM stock sells for $48 per share. You
will realize a ______ on the investment.
A.
B.
C.
D.
$300 profit
$100 loss
$400 loss
$200 profit
87. You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You are
considering either using puts or calls to hedge this position. Given this, which of the following statements
is/are correct?
I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely the hedging with puts is probably better than hedging with short
calls.
A.
B.
C.
D.
I only
II only
I and III only
I, II and III
88. You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You
hold the position until the expiration date when IBM stock sells for $95 per share. You will realize a
______ on this strip.
A.
B.
C.
D.
$300 profit
$100 loss
$500 profit
$200 profit
15 Key
1.
You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the
expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment.
A.
B.
C.
D.
$200 profit
$200 loss
$300 profit
$300 loss
Long Call Profit = Max[0,($123 - $120)(100)] - $500 = -$200

Bodie - Chapter 15 #1
Difficulty: Medium
2.
You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the
A.
B.
C.
D.
$200 profit
$200 loss
$500 profit
$500 loss
Long Call Profit = Max[0,($123 - $125)(100)] - $500 = -$500

Difficulty: Medium
3.
You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the
A.
B.
C.
D.
$300 profit
$300 loss
$500 loss
$200 profit
Long Put Profit = Max[0,($120 - $123)(100)] - $300 = -$300

Difficulty: Medium
4.
You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration
A.
B.
C.
D.
$300 profit
$200 loss
$600 loss
$200 profit
Short Call Profit = Min[0,($120 - $121))(100)] + $400 = $300

Difficulty: Medium
5.
A(n) ______ option can only be exercised on the expiration date.

A.
B.
C.
D.
Mexican
Asian
American
European
Difficulty: Easy
6.
All else the same, an ______ style option will be ______ valuable than a ______ style option.
A.
B.
C.
D.
American, more, European

American, less, European
American, more, Canadian
American, less, Canadian
Difficulty: Medium
7.
At contract maturity the value of a call option is ___________ where X equals the option's strike price
and ST is the stock price at contract expiration.
A.
B.
C.
D.
Max(0, ST - X)
Min(0, ST - X)
Max(0, X - ST)
Min(0, X - ST)
Difficulty: Medium
8.
At contract maturity the value of a put option is ___________ where X equals the option's strike price
and ST is the stock price at contract expiration.
A.
B.
C.
D.
Max(0, ST - X)
Min(0, ST - X)
Max(0, X - ST)
Min(0, X - ST)
Difficulty: Medium
9.
An American put option gives its holder the right to _________.

A.
B.
C.
D.
Difficulty: Easy
10.
An Asian call option gives its holder the right to ____________.

B. buy the underlying asset at a price determined by the average stock price during some specified
portion of the option's life
D. sell the underlying asset at a price determined by the average stock price during some specified
Difficulty: Easy
11.
An Asian put option gives its holder the right to ____________.

B. buy the underlying asset at a price determined by the average stock price during some specified
D. sell the underlying asset at a price determined by the average stock price during some specified
Difficulty: Easy
12.
A down-and-out option _______________.

A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the
B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term
of the option
the option
Difficulty: Easy
13.
A down-and-in option _______________.

A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the
B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term
of the option
the option
Difficulty: Easy
14.
A quanto provides its holder with ______________.

A.
B.
C.
D.
the right to participate in the payoffs from a portfolio of gambling casino stocks
the right to exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
the right to participate in the investment performance of a foreign security
the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate
Difficulty: Medium
15.
You purchase a call option on a stock. The profit at contract maturity of the option position is
___________ where X equals the option's strike price, ST is the stock price at contract expiration and
C0 is the original purchase price of the option.
A.
B.
C.
D.
Max(-C0, ST - X - C0)
Min(-C0, ST - X - C0)
Max(C0, ST - X + C0)
Max(0, ST - X - C0)
Difficulty: Medium
16.
A lookback option provides its holder with _______________.

A. a payoff determined by either the maximum or minimum price of the underlying stock during the life
of the option
B. a payoff determined by the difference between the maximum and minimum price of the underlying
stock during the life of the option
C. a payoff if the firm's stock price falls below some specified dollar amount during the term of the
option
D. a payoff based on the average price of the underlying stock over the life of the option
Difficulty: Easy
17.
You write a put option on a stock. The profit at contract maturity of the option position is ___________
where X equals the option's strike price, ST is the stock price at contract expiration and P0 is the original
premium of the put option.
A.
B.
C.
D.
Max(P0, X - ST - P0)
Min(-P0, X - ST - P0)
Min(P0, ST - X + P0)
Max(0, ST - X - P0)
Difficulty: Hard
18.
Longer term American style options with maturities of up to three years are called __________.
A.
B.
C.
D.
warrants
LEAPS
GICs
CATs
Difficulty: Easy
19.
The initial maturities of most exchange traded options are generally __________.
A.
B.
C.
D.
less than a year

less than 2 years
Difficulty: Easy
20.
A futures call option provides its holder with the right to ___________.
A.
B.
C.
D.
purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock
purchase a futures contract at a specified price for a specified period of time
deliver a futures contract and receive a specified price at a specific date in the future
Difficulty: Easy
21.
Exchange traded stock options expire on the _______________ of the expiration month.
A.
B.
C.
D.
second Monday
third Wednesday
second Thursday
third Friday
Difficulty: Medium
22.
The writer of a put option _______________.

A.
B.
C.
D.
agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires
has the right to buy shares at a set price
has the right to sell shares at a set price
Difficulty: Easy
23.
Advantages of exchange traded options over OTC options include all but which one of the following?
A.
B.
C.
D.
Ease and low cost of trading

Anonymity of participants
Contracts that are tailored to meet the needs of market participants
No concerns about counterparty credit risk
Difficulty: Easy
24.
Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.
A.
B.
C.
D.
1
10
100
1,000
Difficulty: Easy
25.
Exercise prices for listed stock options usually occur in increments of ____, and bracket the current
stock price.
A.
B.
C.
D.
$1
$5
$20
$25
Difficulty: Easy
26.
You buy a call option and a put option on General Electric. Both the call option and the put option have
the same exercise price and expiration date. This strategy is called a _________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
Difficulty: Easy
27.
In 1973, trading of standardized options on a national exchange started on the _________.

A.
B.
C.
D.
AMEX
CBOE
NYSE
CFTC
Difficulty: Easy
28.
An American call option gives the buyer the right to _________.

A.
B.
C.
D.
Difficulty: Easy
29.
A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple
Beverage is $24.25. The put option is _________.
A.
B.
C.
D.
at the money
in the money
out of the money
knocked out
Difficulty: Easy
30.
You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and
write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is
called a ________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
Difficulty: Easy
31.
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of
Brocklehurst Corp. is $32. The call option is _________.
A.
B.
C.
D.
at the money
in the money
out of the money
knocked in
Difficulty: Easy
32.
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is
called a _________.
A.
B.
C.
D.
covered call
long straddle
naked call
money spread
Difficulty: Easy
33.
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in
September and write a call option on Summit Corp. with an exercise price of $40 and an expiration date
in October. This strategy is called a _________.
A.
B.
C.
D.
time spread
long straddle
short straddle
money spread
Difficulty: Easy
34.
A European call option gives the buyer the right to _________.

A.
B.
C.
D.
Difficulty: Easy
35.
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This
strategy is called a _________.
A.
B.
C.
D.
long straddle
naked put
protective put
short stroll
Difficulty: Medium
36.
The value of a listed call option on a stock is lower when _______________.

A.
B.
C.
D.
II, III and IV only

I, III and IV only
I, II and III only
I, II, III and IV
Difficulty: Medium
37.
The Option Clearing Corporation is owned by _________.

A.
B.
C.
D.
the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation
the Federal Reserve system
major U.S. banks
Difficulty: Easy
38.
The value of a listed put option on a stock is lower when _______________.

A.
B.
C.
D.
II only
II and IV only
I, II and III only
I, II, III and IV
Difficulty: Medium
39.
The maximum loss a buyer of a stock call option can suffer is the _________.
A.
B.
C.
D.
call premium
stock price
stock price minus the value of the call
strike price minus the stock price
Difficulty: Easy
40.
Which one of the statements about margin requirements on option positions is not correct?
A. The margin required will be higher if the option is in the money.
B. If the required margin exceeds the posted margin the option writer will receive a margin call.
C. A buyer of a put or call option does not have to post margin.
D. Even if the writer of a call option owns the stock the writer will have to meet the margin requirement
in cash.
Difficulty: Medium
41.
A European put option gives its holder the right to _________.

A.
B.
C.
D.
Difficulty: Easy
42.
The potential loss for a writer of a naked call option on a stock is _________.
A.
B.
C.
D.
equal to the call premium

larger the lower the stock price
limited
unlimited
Difficulty: Medium
43.
A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put
option will want the value of the underlying asset to _________.
A.
B.
C.
D.
decrease, decrease
decrease, increase
increase, decrease
increase, increase
Difficulty: Medium
44.
Buyers of listed options __________ required to post margins and writers of naked listed options
__________ required to post margins.
A.
B.
C.
D.
are; are not

are; are
are not; are
are not; are not
Difficulty: Medium
45.
An option with a payoff that depends on the average price of the underlying asset during at least some
portion of the life of the option is called an ______ option.
A.
B.
C.
D.
American
European
Asian
Australian
Difficulty: Easy
46.
A down-and-out option is one type of ________ option.

A.
B.
C.
D.
barrier
lookback
digital
Asian
Difficulty: Medium
47.
A "bet" option is also called a ____ option.

A.
B.
C.
D.
barrier
lookback
digital
foreign exchange
Difficulty: Medium
48.
Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?
A.
B.
C.
D.
SPX
DJX
CME
OEX
Difficulty: Medium
49.
The September 14, 2009 price quotation for a Boeing call option with a strike price of $50 due to expire
in November is $3.50 while the stock price of Boeing is $51. The premium on one Boeing November 50
call contract is _________.
A.
B.
C.
D.
$1
$2.50
$250.00
$350.00

Difficulty: Easy
50.
You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you
could gain from this strategy is _________.
A.
B.
C.
D.
$120
$1,000
$11,000
$12,000
Profit = 100(120 - 10) = 11,000.00

Difficulty: Medium
51.
You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract.
The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position
is _________.
A.
B.
C.
D.
$125
$450
$575
unlimited
Loss = 100(1.25 + 4.50) = 575.00 if stock price is $50 at expiration.

Difficulty: Medium
52.
You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50
put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off
__________ in August.
A.
B.
C.
D.
only if the stock price is either lower than $44.25 or higher than $55.75
only if the stock price is between $44.25 and $55.75
only if the stock price is higher than $55.75
only if the stock price is lower than $44.25
You have positive profit in the range $50 - ($1.25 + $4.50) and $50 + ($1.25 + $4.50)
Difficulty: Medium
53.
Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one
Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas
Instruments stock is $79, your profit would be _________.
A.
B.
C.
D.
$150
$400
$600
$1,850
Profit = 100 [(79 - 75)] - 8.50 + 6.00] = $150

Difficulty: Hard
54.
__________ is the most risky transaction to undertake in the stock index option markets if the stock
market is expected to fall substantially after the transaction is completed.
A.
B.
C.
D.
Writing an uncovered call option

Writing an uncovered put option
Buying a call option
Buying a put option
Difficulty: Easy
55.
Which one of the following is a correct statement?

A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options
does not.
B. A convertible bond consists of a straight bond plus a specified number of detachable warrants.
C. Call options always have an initial maturity greater than one year while warrants have an initial
maturity less than one year.
D. Call options may be convertible into the stock while warrants are not convertible into the stock.
Difficulty: Medium
56.
A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price
of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________
and the maximum per share gain to the writer of an uncovered call is _________.
A.
B.
C.
D.
$33.00; $3.50
$33.00; $31.50
$35.00; $3.50
$35.00; $35.00
Maximum per share loss to put writer = (35 - 0) + 2 = 33.00 if stock price is $0 at expiration.
Maximum per share gain to call writer = 3.50 if stock price is below $40 at expiration.
Difficulty: Medium
You are cautiously bullish on the common stock of the Wildwood Corporation over the next several
months. The current price of the stock is $50 per share. You want to establish a bullish money spread to
help limit the cost of your option position. You find the following option quotes:
Bodie - Chapter 15
57.
To establish a bull money spread with calls you would _______________.

A.
B.
C.
D.

buy the 45 call and buy the 55 call
sell the 45 call and sell the 55 call
Difficulty: Medium
58.
Ignoring commissions, the cost to establish the bull money spread with calls would be _______.
A.
B.
C.
D.
$1,050
$650
$400
$400 income rather than cost
To establish a bull money spread with calls you would buy the 45 call at a cost of $8.50 and write the 55
call, earning the $2.00 premium. The initial cost is ($2.00 - $8.50)(100) = -$650.
Difficulty: Hard
59.
If in June the stock price is $53 your net profit on the bull money spread would be ________.
A.
B.
C.
D.
$300
-$400
$150
$50
ST = $53 at contract maturity in June. Profit = C45,June - C55,June - Initial Cost

Profit = [Max(0,$53 - $45)-Max(0, $53 - $55)](100) - $650 = $150
Difficulty: Hard
60.
To establish a bull money spread with puts you would _______________.

A.
B.
C.
D.
sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put
buy the 55 put and sell the 45 put
sell the 45 put and sell the 55 put
Difficulty: Medium
61.
Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be
$52. Ignoring commissions the net profit on your position is __.
A.
B.
C.
D.
$500
$700
$200
$250
To establish a bull money spread with puts you would buy the 45 put at a cost of $2.00 and write the 55
put, earning the $7.50 premium. The initial revenue is ($7.50 - $2.00)(100) = $550.
ST = $52 at contract maturity in June. Profit = P45,June - P55,June + Initial Revenue
Profit = [Max(0,$45 - $52) - Max(0, $55 - $52)](100) + $550 = $250
Difficulty: Hard
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share
for months, and you believe it is going to stay in that range for the next three months. The price of a
three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and
exercise price sells for $4.
Bodie - Chapter 15
62.
What would be a simple options strategy using a put and a call to exploit your conviction about the
stock price's future movement?
A.
B.
C.
D.
Sell a call
Purchase a put
Sell a straddle
Buy a straddle
Difficulty: Medium
63.
Selling a straddle would generate total premium income of _____.

A.
B.
C.
D.
$300
$400
$500
$700
Sell a straddle = sell a put + sell a call

Premium income for selling a straddle = (P0 + C0)100 = ($3 + $4)(100) = $700
Difficulty: Medium
64.
Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your
net profit on the strap?
A.
B.
C.
D.
$200
$300
$700
$400
Selling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = ((2)(4) + 3)(100)
= $1100. If the final stock price is $42 the position profit is found as Profit = [-2Max($0,$42 - 40) +
Max($0,$40 - $42)](100) + $1100 = $700
Difficulty: Hard
65.
How can you create a position involving a put, a call, and riskless lending that would have the same
payoff structure as the stock at expiration?
A.
B.
C.
D.
Buy the call, sell the put; lend the present value of $40
Sell the call, buy the put; lend the present value of $40
Buy the call, sell the put; borrow the present value of $40
Sell the call, buy the put; borrow the present value of $40
Difficulty: Hard
66.
A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10%
over the next three months. You believe there is a 30% chance the stock will drop by 5% and you think
there is only a 10% chance of a major drop in price of 20%. At the money 3 month puts are available at
a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of
three months?
A.
B.
C.
D.
$300
$200
$475
$0
E[Profit] = -[0.60Max($0,$50 - ($50)(1.1)) + 0.30Max($0,$50 - ($50)(0.95)) + 0.10Max($0,$50 - ($50)

(0.80))](100) + $650 = - [0.6 (0) + 0.3(250) + 0.1(1000)] + 650 = $475
Difficulty: Hard
67.
A covered call strategy benefits from what environment?

A.
B.
C.
D.
Falling interest rates

Price stability
Price volatility
Unexpected events
Difficulty: Medium
68.
If you combine a long stock position with buying an at the money put option the resulting net payoff
profile will resemble the payoff profile of a _______.
A.
B.
C.
D.
long call
short call
short put
long put
Difficulty: Medium
69.
Which strategy benefits from upside price movement and has some protection should the price of the
security fall?
A.
B.
C.
D.
Bull spread
Long put
Short call
Straddle
Difficulty: Medium
70.
What combination of puts and calls can simulate a long stock investment?
A.
B.
C.
D.

Difficulty: Medium
71.
An investor purchases a long call at a price of $2.50. The expiration price is $35.00. If the current stock
price is $35.10, what is the break even point for the investor?
A.
B.
C.
D.
$32.50
$35.00
$37.50
$37.60
Break even = 35.00 + 2.50 = 37.50

Difficulty: Easy
72.
An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring
commissions, if the option was purchased for a price of $0.85, what is the break even point for the
investor?
A.
B.
C.
D.
$24.15
$25.00
$25.87
$27.86
Break even = 25 - .85 = 24.15

Difficulty: Easy
73.
Which of the following strategies makes a profit if the stock price stays stable?
A.
B.
C.
D.

Difficulty: Medium
74.
Which of the following strategies makes a profit if the stock price declines and loses money when the
stock price increases?
A.
B.
C.
D.

Difficulty: Medium
75.
If you combine a long stock position with selling an at the money call option the resulting net payoff
profile will resemble the payoff profile of a _______.
A.
B.
C.
D.
long call
short call
short put
long put
Difficulty: Hard
76.
What strategy could be considered insurance for an investment in a portfolio of stocks?

A.
B.
C.
D.
Covered call
Protective put
Short put
Straddle
Difficulty: Medium
77.
What strategy is designed to ensure a value within the bounds of two different stock prices?
A.
B.
C.
D.
Collar
Covered Call
Protective put
Straddle
Difficulty: Medium
78.
You are convinced that a stock's price will move by at least 15% over the next three months. You are
not sure which way the price will move, but you believe that the results of a patent hearing are definitely
going to have a major effect on the stock price. You are somewhat more bullish than bearish however.
Which one of the following options strategies best fits this scenario?
A.
B.
C.
D.
Buy a strip
Buy a strap
Buy a straddle
Write a straddle
Difficulty: Hard
79.
When issued most convertible bonds are issued _____________.

A.
B.
C.
D.
deep in the money

deep out of the money
slightly out of the money
slightly in the money
Difficulty: Medium
80.
A convertible bond is deep in the money. This means the bond price will closely track the __________.
A.
B.
C.
D.
straight debt value of the bond

conversion value of the bond
straight debt value of the bond minus the conversion value
straight debt value of the bond plus the conversion value
Difficulty: Medium
81.
Warrants differ from listed options in that ________.

I. exercise of warrants results in dilution of a firm's earnings per share
II. when warrants are exercised new shares of stock must be created
III. warrant exercise result in cash flows to the firm whereas exercise of listed options does not
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
Difficulty: Medium
82.
Suppose you find two bonds identical in all respects except that Bond A is convertible to common stock
and Bond B is not. Bond A is priced at $1,245 and Bond B is priced at $1,120. Bond A has a promised
yield to maturity of 5.6% and Bond B has a promised yield to maturity of 6.7%. The stock of Bond A is
trading at $49.80 per share. Which of the following statements is/are correct?
I. The value of the conversion option for Bond A is $125.
II. The lower promised yield to maturity of Bond A indicates that the bond is priced according to its
straight debt value rather than its conversion value.
III. Bond A can be converted into 25 shares of stock.
A.
B.
C.
D.
II only
I and III only
III only
I, II and III
I. value of conversion option = $1,245 - $1,120 = $125

II. the lower yield on the bond that differs only in it conversion feature indicates the bond is priced
according to its conversion value, not its straight debt value
III. $1,245/$49.80 = $25.00
Difficulty: Hard
83.
You find digital option quotes on jobless claims. You can buy a call option with a strike price of
300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero
otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is
available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with
the 305,000 strike and jobless claims actually wind up at 303,000 your net profit on the position is
______.
A.
B.
C.
D.
-$15
$200
$85
$185
Initial cost = -C300 + C305 = -$68 + $53 = -$15

At actual jobless claims of 303,000 at contract maturity the C300 call is worth $100 and the C305 call is
worthless. Profit = + $100 - $0 -$15 = $85
Difficulty: Medium
84.
Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this
year due to tax reasons but he is concerned the stock will drop in value before year end. Bill wants to
use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain.
January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise
price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in
January, Bill's net position value including the option profit or loss and the stock is _________.
A.
B.
C.
D.
$195,000
$220,000
$175,000
$215,000
Position value = 5000 shares x $45/share = $225,000. To establish a collar you would need 5000/100
= 50 options. You would buy the 50 puts at a cost of $3(100)(50) = $15,000 and write the 50 calls,
earning a premium of $2(100)(50) = $10,000. The initial cost is $15,000 - $10,000 = $5,000. If the stock
price in January is $35 then profit can be found as:
Profit = [Max($0,$40 - $35) - Max($0,$35 - $50)](100)(50) - $5,000 = $20,000
New Stock value = 5000 shares x $35 = $175,000 so net position value = $175,000 + $20,000 =
$195,000
Difficulty: Hard
85.
You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you
are ready to sell so you are considering purchasing either at the money or out of the money puts. If you
decide to purchase the out of the money puts your maximum loss is __________ than if you buy at the
money puts and your maximum gain is __________.
A.
B.
C.
D.
greater; lower
greater; greater
lower; greater
lower; lower
Difficulty: Hard
86.
You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2 for 1 split prior
to the expiration date. You hold the option until the expiration date when IBM stock sells for $48 per
share. You will realize a ______ on the investment.
A.
B.
C.
D.
$300 profit
$100 loss
$400 loss
$200 profit
Long Call Profit = 2Max[0,($48 - ($90/2)(100)] - $400 = $200

Difficulty: Hard
87.
You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You
are considering either using puts or calls to hedge this position. Given this, which of the following
statements is/are correct?
I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely the hedging with puts is probably better than hedging with
short calls.
A.
B.
C.
D.
I only
II only
I and III only
I, II and III
Difficulty: Medium
88.
You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You
hold the position until the expiration date when IBM stock sells for $95 per share. You will realize a
______ on this strip.
A.
B.
C.
D.
$300 profit
$100 loss
$500 profit
$200 profit
Selling an IBM July 90 strip entails selling two IBM July 90 puts and one IBM July 90 call. Initial
income = C90 + 2P90 = (4 + 2(3))(100) = $1000. If the final stock price is $95 the position value is
found as
Profit = [-Max($0,$95 - 90) + 2Max($0,$90 - $95)](100) + $1000 = -$500 + $1000 = $500
Difficulty: Hard
15 Summary
Category
Bodie - Chapter 15
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
# of
Questions
90
31
15
42

Chapter 15 - Options Markets

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 15 - Options Markets

Uploaded by

Copyright:

Available Formats

15

A(n) ______ option can only be exercised on the expiration date.

American, more, European

An American put option gives its holder the right to _________.

13. A down-and-in option _______________.

16. A lookback option provides its holder with _______________.

less than a year

purchase a particular stock at some time in the future at a specified price

22. The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

Ease and low cost of trading

II, III and IV only

37. The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

equal to the call premium

are; are not

46. A down-and-out option is one type of ________ option.

47. A "bet" option is also called a ____ option.

Writing an uncovered call option

55. Which one of the following is a correct statement?

buy the 55 call and sell the 45 call

sell the 55 put and buy the 45 put

63. Selling a straddle would generate total premium income of _____.

67. A covered call strategy benefits from what environment?

Falling interest rates

Long call and short put

Long call and short put

Long call and short put

79. When issued most convertible bonds are issued _____________.

deep in the money

straight debt value of the bond

81. Warrants differ from listed options in that ________.

Long Call Profit = Max[0,($123 - $120)(100)] - $500 = -$200

Long Call Profit = Max[0,($123 - $125)(100)] - $500 = -$500

Long Put Profit = Max[0,($120 - $123)(100)] - $300 = -$300

Short Call Profit = Min[0,($120 - $121))(100)] + $400 = $300

A(n) ______ option can only be exercised on the expiration date.

American, more, European

An American put option gives its holder the right to _________.

An Asian call option gives its holder the right to ____________.

An Asian put option gives its holder the right to ____________.

A down-and-out option _______________.

A down-and-in option _______________.

A quanto provides its holder with ______________.

A lookback option provides its holder with _______________.

less than a year

purchase a particular stock at some time in the future at a specified price

The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

Ease and low cost of trading

In 1973, trading of standardized options on a national exchange started on the _________.

An American call option gives the buyer the right to _________.

A European call option gives the buyer the right to _________.

The value of a listed call option on a stock is lower when _______________.

II, III and IV only

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

The value of a listed put option on a stock is lower when _______________.

A European put option gives its holder the right to _________.

equal to the call premium

are; are not

A down-and-out option is one type of ________ option.

A "bet" option is also called a ____ option.