Final Multiple Choice Questions PDF

BUS 494: Derivatives - Final Multiple Choice Questions Chapter 9: Mechanics of Options Markets Multiple Choice Test Bank 121. Which of the following describes a call option? A. The right to buy an asset for a certain price B. The obligation to buy an asset for a certain price C. The right to sell...

BUS 494: Derivatives - Final Multiple Choice Questions Chapter 9: Mechanics of Options Markets Multiple Choice Test Bank 121. Which of the following describes a call option? A. The right to buy an asset for a certain price B. The obligation to buy an asset for a certain price C. The right to sell an asset for a certain price D. The obligation to sell an asset for a certain price Answer: A 122. Which of the following is true? A. A long call is the same as a short put B. A short call is the same as a long put C. A call on a stock plus a stock is the same as a put D. None of the above Answer: D 123. An investor has exchange-traded options to sell 100 shares for $20. There is a 2-for-1 stock split. Which of the following is the position of the investor after the stock split? A. Put options to sell 100 shares for $20 B. Put options to sell 100 shares for $10 C. Put options to sell 200 shares for $10 D. Put options to sell 200 shares for $20 Answer: C 124. An investor has exchange-traded options to sell 100 shares for $20. There is a 25% stock dividend. Which of the following is the position of the investor after the stock dividend? A. Put options to sell 100 shares for $20 B. Put options to sell 75 shares for $25 C. Put options to sell 125 shares for $15 D. Put options to sell 125 shares for $16 Answer: D 125. An investor has exchange-traded options to sell 100 shares for $20. There is a $1 cash dividend. Which of the following is then the position of the investor? A. The investor has put options to sell 100 shares for $20 B. The investor has put options to sell 100 shares for $19 C. The investor has put options to sell 105 shares for $19 D. The investor has put options to sell 105 shares for $19.05 Answer: A 126. Which of the following describes a short position in an option? A. A position in an option lasting less than one month B. A position in an option lasting less than three months C. A position in an option lasting less than six months D. A position where an option has been sold Answer: D 127. Which of the following describes a difference between a warrant and an exchange-traded stock option? A. In a warrant issue, someone has guaranteed the performance of the option seller if the option is exercised B. The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading C. Exchange-traded stock options have a strike price D. Warrants cannot be traded after they have been purchased Answer: B 128. Which of the following describes LEAPS? A. Options which are partly American and partly European B. Options where the strike price changes through time C. Exchange-traded stock options with longer lives than regular exchange-traded stock options D. Options on the average stock price during a period Answer: C 129. Which of the following is an example of an option class? A. All calls on a certain stock B. All calls with a particular strike price on a certain stock C. All calls with a particular time to maturity on a certain stock D. All calls with a particular time to maturity and strike price on a certain stock Answer: A 130. Which of the following is an example of an option series? A. All calls on a certain stock B. All calls with a particular strike price on a certain stock C. All calls with a particular time to maturity on a certain stock D. All calls with a particular time to maturity and strike price on a certain stock Answer: D 13 1. Which of the following must post margin? A. The seller of an option B. The buyer of an option C. The seller and the buyer of an option D. Neither the seller nor the buyer of an option Answer: A 132. Which of the following describes a long position in an option? A. A position where there is more than one year to maturity B. A position where there is more than five years to maturity C. A position where an option has been purchased D. A position that has been held for a long time Answer: C 133. Which of the following is NOT traded by the CBOE? A. Weeklys B. Monthlys C. Binary options D. DOOM options Answer: B 134.When a six-month option is purchased A. The price must be paid in full B. Up to 25% of the option price can be borrowed using a margin account C. Up to 50% of the option price can be borrowed using a margin account D. Up to 75% of the option price can be borrowed using a margin account Answer: A 135. Which of the following is true for CBOE stock options? A. There are no margin requirements B. The initial margin and maintenance margin are determined by formulas and are equal C. The initial margin and maintenance margin are determined by formulas and are different D. The maintenance margin is usually about 75% of the initial margin Answer: B 136. The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader’s net profit or loss? A. Loss of $1,500 B. Loss of $500 C. Gain of $1,500 D. Loss of $1,000 Answer: C 137. A trader buys a call and sells a put with the same strike price and maturity date. What is the Is position equivalent to? A. A long forward B. A short forward C. Buying the asset D. None of the above Answer: A 138. The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10. When does the trader make a profit? A. When the stock price is below $60 B. When the stock price is below $64 C. When the stock price is below $54 D. When the stock price is below $50 Answer: D 139. Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true? A. It is possible for both options to be in the money B. It is possible for both options to be out of the money C. One of the options must be in the money D. One of the options must be either in the money or at the money Answer: D 140. In which of the following cases is an asset NOT considered constructively sold? A. The owner shorts the asset B. The owner buys an in-the-money put option on the asset C. The owner shorts a forward contract on the asset D. The owner shorts a futures contract on the stock Answer: B Chapter 10: Properties of Stock Options Multiple Choice Test Bank 141. When the stock price increases with all else remaining the same, which of the following is true? Q. Both calls and puts increase in value R. Both calls and puts decrease in value S. Calls increase in value while puts decrease in value T. Puts increase in value while calls decrease in value Answer: C 142. When the strike price increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: D 143. When volatility increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: A 144. When the dividend increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: D 145. When interest rates increase with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value Answer: C 146. When the time to maturity increases with all else remaining the same, which of the following is true? A. European options always increase in value B. The value of European options either stays the same or increases C. There is no effect on European option values D. European options are liable to increase or decrease in value Answer: D 147. The price of a stock, which pays no dividends, is $30 and the strike price of a one-year European call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? A. $5.00 B. $5.98 C. $4.98 D. $3.98 Answer: B 148. A stock price (which pays no dividends) is $50 and the strike price of a two-year European put option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? A. $4.00 B. $3.86 C. $2.86 D. $0.86 Answer: D 149. Which of the following is NOT true? A. An American put option is always worth less than the present value of the strike price B. A European put option is always worth less than the present value of the strike price C. A European call option is always worth less than the stock price D. An American call option is always worth less than the stock price Answer: A 150. Which of the following best describes the intrinsic value of an option? A. The value it would have if the owner were forced to exercise immediately B. The Black-Scholes-Merton price of the option C. The lower bound for the option’s price D. The amount paid for the option Answer: A 151. Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early? A. Expected dividends increase B. Interest rates decrease C. The stock price volatility decreases D. All of the above Answer: C 152. Which of the following is true? A. An American call option on a stock should never be exercised early B. An American call option on a stock should never be exercised early when no dividends are expected C. There is always some chance that an American call option on a stock will be exercised early D. There is always some chance that an American call option on a stock will be exercised early when no dividends are expected Answer: B 153. Which of the following is the put-call parity result for a non-dividend-paying stock? A. The European put price plus the European call price must equal the stock price plus the present value of the strike price B. The European put price plus the present value of the strike price must equal the European call price plus the stock price C. The European put price plus the stock price must equal the European call price plus the strike price D. The European put price plus the stock price must equal the European call price plus the present value of the strike price Answer: D 15 4. Which of the following is true when dividends are expected? A. Put-call parity does not hold B. The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price C. The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price D. The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate Answer: B 155. The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. What is the price of a one-year European put option on the stock with a strike price of $50? A. $9.91 B. $7.00 C. $6.00 D. $2.09 Answer: D 156. The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. A dividend of $1 is expected in six months. What is the price of a one-year European put option on the stock with a strike price of $50? A. $8.97 B. $6.97 C. $3.06 D. $1.12 Answer: C 157. A European call and a European put on a stock have the same strike price and time to maturity. At 10:00 am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01 a.m. News reaches the market that does not affect the stock price or interest rates but increases volatilities. As a result, the price of the call changes to $4.50. Which of the following is correct? A. The put price increases to $6.00 B. The put price decreases to $2.00 C. The put price increases to $5.50 D. It is possible that there is no effect on the price Answer: C 158. Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7. The current stock price is $49. Which of the following is true? A. The call price is high relative to the put price B. The put price is high relative to the call price C. Both the call and put must be mispriced D. None of the above Answer: D 159. Which of the following is true for American options? A. Put-call parity provides an upper and lower bound for the difference between call and put prices B. Put call parity provides an upper bound but no lower bound for the difference between call and put prices C. Put call parity provides a lower bound but no upper bound for the difference between call and put prices D. There are no put-call parity results Answer: A 160. Which of the following can be used to create a long position in a European put option on a stock? A. Buy a call option on the stock and buy the stock B. Buy a call on the stock and short the stock C. Sell a call option on the stock and buy the stock D. Sell a call option on the stock and sell the stock Answer: B Chapter 11: Trading Strategies Involving Options Multiple Choice Test Bank 161. Which of the following creates a bull spread? U. Buy a low strike price call and sell a high strike price call V. Buy a high strike price call and sell a low strike price call W. Buy a low strike price call and sell a high strike price put X. Buy a low strike price put and sell a high strike price call Answer: A 162. Which of the following creates a bear spread? A. Buy a low strike price call and sell a high strike price call B. Buy a high strike price call and sell a low strike price call C. Buy a low strike price call and sell a high strike price put D. Buy a low strike price put and sell a high strike price call Answer: B 163. Which of the following creates a bull spread? A. Buy a low strike price put and sell a high strike price put B. Buy a high strike price put and sell a low strike price put C. Buy a high strike price call and sell a low strike price put D. Buy a high strike price put and sell a low strike price call Answer: A 164. Which of the following creates a bear spread? A. Buy a low strike price put and sell a high strike price put B. Buy a high strike price put and sell a low strike price put C. Buy a high strike price call and sell a low strike price put D. Buy a high strike price put and sell a low strike price call Answer: B 165. What is the number of different option series used in creating a butterfly spread? A. 1 B. 2 C. 3 D. 4 Answer: C 166The.A stock price is currently $23. A reverse (i.e. short) butterfly spread is created from options with strike prices of $20, $25, and $30. Which of the following is true? A. The gain when the stock price is greater than $30 is less than the gain when the stock price is less than $20 B. The gain when the stock price is greater than $30 is greater than the gain when the stock price is less than $20 C. The gain when the stock price is greater than $30 is the same as the gain when the stock price is less than $20 D. It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20 Answer: C 167. Which of the following is correct? A. A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different B. A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different C. A calendar spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different D. A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different Answer: D 168. What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75? A. Neutral Calendar Spread B. Bullish Calendar Spread C. Bearish Calendar Spread D. None of the above Answer: B 169. Which of the following is correct? A. A diagonal spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different B. A diagonal spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different C. A diagonal spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different D. A diagonal spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different Answer: C 170. Which of the following is true of a box spread? A. It is a package consisting of a bull spread and a bear spread B. It involves two call options and two put options C. It has a known value at maturity D. All of the above Answer: D 171. How can a straddle be created? A. Buy one call and one put with the same strike price and same expiration date B. Buy one call and one put with different strike prices and the d same expiration date C. Buy one call and two puts with the same strike price and expiration date D. Buy two calls and one put with the same strike price and expiration date Answer: A 172. How can a strip trading strategy be created? A. Buy one call and one put with the same strike price and same expiration date B. Buy one call and one put with different strike prices and the same expiration date C. Buy one call and two puts with the same strike price and expiration date D. Buy two calls and one put with the same strike price and expiration date Answer: C 173. How can a strap trading strategy be created? A. Buy one call and one put with the same strike price and same expiration date B. Buy one call and one put with different strike prices and the same expiration date C. Buy one call and two puts with the same strike price and expiration date D. Buy two calls and one put with the same strike price and expiration date Answer: D 174. How can a strangle trading strategy be created? A. Buy one call and one put with the same strike price and same expiration date B. Buy one call and one put with different strike prices and the same expiration date C. Buy one call and two puts with the same strike price and expiration date D. Buy two calls and one put with the same strike price and expiration date Answer: B 175. Which of the following describes a protective put? A. A long put option on a stock plus a long position in the stock B. A long put option on a stock plus a short position in the stock C. A short put option on a stock plus a short call option on the stock D. A short put option on a stock plus a long position in the stock Answer: A 176. Which of the following describes a covered call? A. A long call option on a stock plus a long position in the stock B. A long call option on a stock plus a short put option on the stock C. A short call option on a stock plus a short position in the stock D. A short call option on a stock plus a long position in the stock Answer: D 177. When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal-protected note? A. A one-year zero-coupon bond plus a one-year call option worth about $59 B. A one-year zero-coupon bond plus a one-year call option worth about $49 C. A one-year zero-coupon bond plus a one-year call option worth about $39 D. A one-year zero-coupon bond plus a one-year call option worth about $29 Answer: B 178. A trader creates a long butterfly spread from options with strike prices of $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)? A. $100 B. $200 C. $300 D. $400 Answer: D 179. A trader creates a long butterfly spread from options with strike prices of $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account)? A. $100 B. $200 C. $300 D. $400 Answer: A 180.Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options? A. $100 B. $200 C. $300 D. $400 Answer: C