Question 1

The writer (seller)  of a regular exchange-listed put-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 2

The value of a put option is positively related to:
I. Exercise price
II. Time to expiration
III. Volatility of the underlying stock price
IV. Risk-free rate

Accepted Answer

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

Question 3

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

Accepted Answer

A European option may be exerc...

Question 4

Briefly explain how position diagrams are useful?

Accepted Answer

Position diagrams show payoffs at option...

Question 5

Suppose an investor sells (writes)  a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

Accepted Answer

A)   The seller will need to deliver stock to the owner of the option
B)   The seller will be obliged to buy stock from the owner of the option
C)   The owner will not exercise his option
D)   None of the above

Question 6

In June 2007, an investor buys a call option on Amgen stock with an exercise of price of
$65 and expiring in January 2009. If the stock price in June 2003 is $60, then this option is:
I. in-the-money
II. out-of-the-money
III. a LEAPS

Accepted Answer

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

Question 7

The higher the underlying stock price: (everything else remaining the same)

Accepted Answer

A)   higher the call price
B)   lower the call price
C)   has no effect on call price
D)   none of the above

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

Briefly explain how an option holder gains from the volatility of the underlying stock price.

Accepted Answer

An option holder gains from the volatili...

Question 11

The higher the underlying stock price: (everything else remaining the same)

Accepted Answer

A)   higher the put price
B)   lower the put price
C)   has no effect on put price
D)   none of the above

Question 12

Options can have a value even when the stock is worthless.

Accepted Answer

A) True 
 B)False

Question 13

Figure-3 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 14

Position diagrams and profit diagrams are one and the same.

Accepted Answer

A) True 
 B)False

Question 15

Options written on volatile assets are worth more than options written on safer assets.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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

Question 18

If the risk-free interest rate increases:

Accepted Answer

A)   the direct effect of it on the call option price is positive
B)   the direct effect of it on the call option price is negative
C)   the direct effect of it on the call option price is unknown
D)   none of the above

Question 19

Define the term "call option."

Accepted Answer

A call option is defined as a ...

Question 20

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

Accepted Answer

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

Exam 20: Understanding Options

The higher the underlying stock price: (everything else remaining the same)

Correct AnswerverifiedShow Answer

Options written on volatile assets are worth more than options written on safer assets.

Correct AnswerverifiedShow Answer

If the risk-free interest rate increases:

Correct AnswerverifiedShow Answer

Define the term "call option."

Correct AnswerverifiedA call option is defined as a ...View AnswerShow Answer

The value of a put option is positively related to: I. Exercise price II. Time to expiration III. Volatility of the underlying stock price IV. Risk-free rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

Correct AnswerverifiedShow Answer

Briefly explain how position diagrams are useful?

Correct AnswerverifiedPosition diagrams show payoffs at option...View AnswerShow Answer

Options can have a value even when the stock is worthless.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure-3 depicts the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In June 2007, an investor buys a call option on Amgen stock with an exercise of price of $65 and expiring in January 2009. If the stock price in June 2003 is $60, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS

Correct AnswerverifiedShow Answer

The higher the underlying stock price: (everything else remaining the same)

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Position diagrams and profit diagrams are one and the same.

Correct AnswerverifiedShow Answer

Briefly explain how an option holder gains from the volatility of the underlying stock price.

Correct AnswerverifiedAn option holder gains from the volatili...View AnswerShow Answer

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

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A call option is defined as a ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Position diagrams show payoffs at option...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
An option holder gains from the volatili...
View Answer

Correct Answer
verified
A European option may be exerc...
View Answer