21) A call option:
A) gives its owner the right to sell a given number of shares or some other asset at a specified
price over a given period.
B) purchaser makes money if the price of the underlying stock or asset decreases.
C) gives its owner the right to purchase a given number of shares of stock or some other asset at
a specified price over a given period.
D) does none of the above.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
22) Which of the following statements is true?
A) A call option is said to be out-of-the-money if the underlying stock is selling above the
exercise price of the option.
B) A put option is said to be in-the-money if the underlying stock is selling below the exercise
price of the option.
C) A put option is said to be out-of-the-money if the underlying stock is selling below the
exercise price of the option.
D) A call option is said to be in-the-money if the underlying stock is selling below the exercise
price of the option.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
23) The minimum value of a call option equals:
A) exercise price – the stock price.
B) stock price – exercise price.
C) call premium – (stock price – exercise price).
D) put premium – (exercise price – stock price).
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
21
24) The owner of a large, diversified stock portfolio could hedge against a steep decline in prices
by:
A) buying call options on a stock index.
B) buying put options on a stock index.
C) selling put options on a stock index.
D) buying both call and put options with the same expiration date.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: hedging
Principles: Principle 2: There Is a Risk-Return Tradeoff
25) A futures contract is a specialized form of a forward contract distinguished by a(n):
A) organized exchange.
B) standardized contract with unlimited price changes and margin requirements.
C) clearinghouse in each futures market.
D) both A and C.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
26) The term futures margin refers to:
A) the percent of potential margin for profit associated with a futures contract.
B) the “good faith” money the purchaser puts down to ensure that the contract will be carried out.
C) the interest-earning account associated with a futures contract.
D) the number of contracts outstanding on a particular futures contract.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures margin
Principles: Principle 2: There Is a Risk-Return Tradeoff
27) The striking price is the:
A) price paid for the option.
B) price at which the stock or asset may be purchased from the writer.
C) minimum value of the option.
D) premium minus the exercise price.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: exercise or striking price
Principles: Principle 2: There Is a Risk-Return Tradeoff
22
28) The term open interest refers to the:
A) total amount of interest paid on an options margin account.
B) number of option contracts in existence at a point in time.
C) interest accumulated on a Treasury bond contract.
D) striking price of an interest rate swap.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
29) The popularity of options can be explained by the use of options:
A) in writing future contracts.
B) as a type of financial insurance.
C) to expand the set of possible investment alternatives available.
D) both B and C.
E) all of the above.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
30) A(n)________ is a financial instrument that can be used to eliminate the effect of both
favorable and unfavorable price movements.
A) convertible securities
B) call option
C) put option
D) futures contracts
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
31) A(n) ________ is a contract that requires the holder to buy or sell a stated commodity at a
specified price at a specified time in the future.
A) warrant
B) option
C) future
D) convertible contract
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
23
32) If you expect a stock’s price to rise, it would be better to purchase a call on that stock than to
purchase a put on it.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
33) The difference between a stock’s current price and the striking price of the option is the
minimum value of the option.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
34) Options can only be purchased for individual stocks, not for funds or indexes.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
35) If you expect a stock’s price to drop, it would be better to sell a call on that stock than to sell
a put on it.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
36) A futures contract provides the holder with the option to buy or sell a stated contract
involving a commodity or financial claim at a specified price over a stated time period.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
37) European and American are different types of stock options and have nothing to do with
where the options are bought and sold.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: American and European options
Principles: Principle 2: There Is a Risk-Return Tradeoff
24
38) Options contracts all expire on the last trading day of the month.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option expiration date
Principles: Principle 2: There Is a Risk-Return Tradeoff
39) There is only one day per month on which a listed option on any stock can expire.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option expiration date
Principles: Principle 2: There Is a Risk-Return Tradeoff
40) There is no actual buying or selling that occurs with a futures contract.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
41) A call option gives its owner the right to sell a given number of shares or some other asset at
a specified price over a given period.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
42) The seller of an option keeps the option premium regardless of whether or not the option is
ever exercised.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option premium
Principles: Principle 2: There Is a Risk-Return Tradeoff
43) An options contract gives its owner the right to buy or sell a fixed number of shares at a
specified price over a limited time period.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
25
44) A futures contract is a specialized form of a forward contract distinguished by an organized
exchange which encourages confidence in the futures market by allowing for the effective
regulation of trading.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
45) The margin on a futures contract refers to the amount of equity the investor initially paid to
purchase the futures contract.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures margin
Principles: Principle 2: There Is a Risk-Return Tradeoff
46) An American option can be exercised only on the expiration date.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: American and European options
Principles: Principle 2: There Is a Risk-Return Tradeoff
47) Open interest provides the investor with some indication of the amount of liquidity
associated with a particular option.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: open interest
Principles: Principle 2: There Is a Risk-Return Tradeoff
48) If a call option’s exercise price is above the stock price, then the option’s intrinsic value is
zero.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
49) The most you can ever lose when you purchase a put or call option is the premium.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
26
50) What are the differences between forward contracts and futures contracts? What are some
advantages and disadvantages of each.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: futures contracts
Principles: Principle 2: There Is a Risk-Return Tradeoff
51) What are the rights and obligations of the buyer and the seller of a call option on common
stock?
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: option contract
Principles: Principle 2: There Is a Risk-Return Tradeoff
52) Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of
$170 per share. The option premium was $4.00 per share.
a. Compute Jorge’s profit or loss if the market value of Amazon’s stock is $180 at expiration.
b. Compute Jorge’s profit or loss if the market value of Amazon’s stock is $160 at expiration.
c. Compute Jorge’s profit or loss if the market value of Amazon’s stock is $172 at expiration.
Topic: 20.4 Managing Risk with Exchange-Traded Financial Derivatives
Keywords: call and put options
Principles: Principle 2: There Is a Risk-Return Tradeoff
27