978-0133423822 Chapter 20 Part 3

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10) The price at which the stock or asset may be purchased from (or sold to) the option

writer is referred to as

A) intrinsic value of the option.

B) option premium.

C) open interest.

D) exercise or striking price.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

11) A(n) ________ can be exercised only on the expiration date.

A) European option

B) at-the-money option

C) short option

D) American option

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

12) Mayspring Corporation common stock is currently selling for $72.00 per share. A call

option on Mayspring Corporation that expires in two months has an exercise price of

$72.50. This call option is said to be

A) out-of-the-money.

B) at-the-money.

C) in-the-money.

D) covered.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk-Return Tradeof

13) Ahmad bought call options on Home Depot with a striking price of $80. The option

premium was $3.82. Just before the contract expired, Home Depot stock was $82 per

share. Ahmad

A) made a proit of $2.00 per share.

B) lost $3.82 per share because the option would not be exercised.

C) made a proit of $3.82 per share.

D) lost $1.82 per share.

Question Status: Revised

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

14) Ahmad bought put options on Verizon with a striking price of $50. The option premium

was $2.64. Just before the contract expired, Verizon stock was at 51.39 per share. Ahmad

A) made a proit of $1.39 per share.

B) lost $2.64 per share because the option would not be exercised.

C) lost $1.39 per share.

D) lost $1.20 per share.

Question Status: Revised

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

15) Barco Corp. common stock is currently selling for $36.50. A call option on Barco stock

costs $.75 per share on a normal contract of 100 shares. This option has an exercise price

of $39 and expires in one month. What is the minimum value of this option?

A) $2.50

B) $75

C) $0

D) $36.50

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

16) How can a currency futures contract be used as a hedge against a potentially dramatic

appreciation of a foreign currency that a U.S. company is expecting to convert into U.S.

dollars?

A) The U.S. company should sell the foreign currency using futures contracts.

B) The U.S. company should buy more foreign currency futures contracts than it should

sell.

C) The U.S. company should buy the foreign currency using futures contracts.

D) This is a standard business situation that would be favorable if it were to happen, so no

hedge is needed.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: hedging

Principles: Principle 2: There Is a Risk–Return Tradeof

17) A call option on a stock is a inancial instrument deined by which of the following

statements?

A) It obligates the investor holding it to sell the stock at the speciied price at the stated

date in the future.

B) It obligates the investor holding it to buy the stock at the speciied price at the stated

date in the future.

C) It gives the investor holding it the right, but not the obligation, to buy the stock at the

speciied price at the stated date in the future.

D) It gives the investor holding it the right, but not the obligation, to sell the stock at the

speciied price at the stated date in the future.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

18) Futures contracts

A) can be used by inancial managers to reduce risk.

B) provide their holder with an opportunity to buy or sell an asset at some future time if the

asset’s value has changed in a manner favorable to the futures contract holder.

C) sustain a small change in value when there is a small change in the price of the

underlying commodity.

D) have all of the characteristics stated above.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures margin

Principles: Principle 2: There Is a Risk–Return Tradeof

19) How can a gold futures contract be used as a hedge against a potentially dramatic

decrease in the price of the gold needed as an input into the production of computer

microprocessors?

A) The computer company should sell gold futures contracts.

B) The computer company should sell more gold futures contracts than it should buy.

C) This is a standard business situation, which would be favorable if it were to happen, so

no hedge is needed.

D) The computer company should lower its inished product prices now in anticipation of

the decrease in the price of gold inputs.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

20) Financial futures include

A) Treasury bond futures, which are the most popular of all futures contracts in terms of

contracts issued.

B) interest rate futures, which have been around the longest.

C) stock index futures, which allow for either a cash settlement or a stock settlement.

D) all of the above.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

21) Unlike the owner of a(n) ________ contract, the owner of a(n) ________ contract does not

have to exercise it.

A) put, call

B) option, futures

C) futures, option

D) long, short

Question Status: New question

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

22) Erin wrote a put option on Verizon stock with a striking price of $53 price per share. At

the expiration date, Verizon was selling for $50 per share. Which statement best describes

the course of action that Erin should or must take?

A) Erin will do nothing because the market price is lower than the striking price.

B) Erin is obliged to buy the Verizon shares at $53, even though the market price is $3.00

lower.

C) Erin must sell the Verizon stock for $53 per share.

D) Erin has the right to sell Verizon stock at $3.00 per share over the market price.

Question Status: New question

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

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).

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

24) The owner of a large, diversiied 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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

26) The term futures margin refers to

A) the percent of potential margin for proit 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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

29) The popularity of options can be explained by the use of options

A) in writing future contracts.

B) as a type of inancial insurance.

C) to expand the set of possible investment alternatives available.

D) both B and C.

Question Status: Revised

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

30) A(n)________ is a inancial instrument that can be used to eliminate the efect of both

favorable and unfavorable price movements.

A) convertible securities

B) call option

C) put option

D) futures contracts

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

31) A ________ is a contract that requires the holder to buy or sell a stated commodity at a

speciied price at a speciied time in the future.

A) warrant

B) option

C) future

D) convertible contract

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

33) The diference between a stock’s current price and the striking price of the option is

the minimum value of the option.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

34) Options can only be purchased for individual stocks, not for funds or indexes.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

36) A futures contract provides the holder with the option to buy or sell a stated contract

involving a commodity or inancial claim at a speciied price over a stated time period.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

37) European and American are diferent types of stock options and have nothing to do

with where the options are bought and sold.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

38) Options contracts all expire on the last trading day of the month.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

39) There is only one day per month on which a listed option on any stock can expire.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: call and put options

Principles: Principle 2: There Is a Risk–Return Tradeof

40) There is no actual buying or selling that occurs with a futures contract.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: futures contracts

Principles: Principle 2: There Is a Risk–Return Tradeof

41) A call option gives its owner the right to sell a given number of shares or some other

asset at a speciied price over a given period.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: hedging

Principles: Principle 2: There Is a Risk–Return Tradeof

42) The seller of an option keeps the option premium regardless of whether or not the

option is ever exercised.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: hedging

Principles: Principle 2: There Is a Risk–Return Tradeof

43) An options contract gives its owner the right to buy or sell a ixed number of shares at a

speciied price over a limited time period.

Question Status: Previous edition

Objective: 20.4 Understand the advantages and disadvantages of using exchange-traded futures and

options contracts to hedge price risk.

Keywords: hedging

Principles: Principle 2: There Is a Risk–Return Tradeof