18) An investor purchases a call option and its underlying stock on the same day. If the
stock appreciates by 25%, the call option will appreciate by ________.
A) more than 25%
B) less than 25%
C) exactly 25%
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
19) The payof to the holder of a call option is ________.
A) strike price minus stock price if stock price is more than strike price
B) strike price minus stock price if stock price is less than strike price
C) stock price minus strike price if stock price is less than strike price
D) stock price minus strike price if stock price is more than strike price
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
20) The payof to the holder of a put option is ________.
A) strike price minus stock price if stock price is more than strike price
B) strike price minus stock price if stock price is less than strike price
C) stock price minus strike price if stock price is less than strike price
D) stock price minus strike price if stock price is more than strike price
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
21
Use the igure for the question below.
21) This graph depicts the payofs of a ________.
A) short position in a put option at expiration
B) short position in a call option at expiration
C) long position in a put option at expiration
D) long position in a call option at expiration
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
22
Use the igure for the question below.
22) This graph depicts the payofs of a ________.
A) long position in a put option at expiration
B) short position in a call option at expiration
C) short position in a put option at expiration
D) long position in a call option at expiration
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
23) You pay $3.25 for a call option on Luther Industries that expires in three months with a
strike price of $40.00. Three months later, at expiration, Luther Industries is trading at
$41.00 per share. Your proit per share on this transaction is closest to ________.
A) -$1.00
B) $1.00
C) -$2.25
D) $2.25
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
23
24) You have shorted a call option on WSJ stock with a strike price of $50. The option will
expire in exactly six months. If the stock is trading at $60 in three months, what will you
owe for each share in the contract?
A) $0
B) $60
C) $50
D) $10
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
25) You have shorted a call option on WSJ stock with a strike price of $50. The option will
expire in exactly six months. If the stock is trading at $45 in three month, what will you
owe for each share in the contract?
A) $0
B) $50
C) $60
D) $10
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
26) What is the long position of an options contract?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
27) What is the short position of an options contract?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
24
21.3 Factors Afecting Options Prices
1) A European option on a stock is more valuable than an otherwise similar American
option on the same stock.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) A European option with a later exercise date may trade potentially for less than an
otherwise identical option with an earlier exercise date.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) In case of normal swings in the risk-free rate, option prices are not very sensitive to
changes in the risk–free rate.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) The value of an otherwise identical call option is ________ if the strike price the holder
must pay to buy the stock is ________.
A) higher, higher
B) lower, lower
C) higher, lower
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
25
5) The value of an otherwise identical call option is ________ if the stock price is ________.
A) higher, higher
B) lower, higher
C) higher, lower
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) The value of an otherwise identical American call option is ________ if the exercise date is
________.
A) higher, longer
B) lower, longer
C) higher, closer
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) The value of a call option ________ with the risk-free rate, and the value of a put option
________ with the risk-free rate.
A) increases, increases
B) decreases, decreases
C) increases, decreases
D) decreases, increases
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8) The value of an option ________ with the volatility of the underlying stock.
A) increases
B) decreases
C) unchanged
D) cannot say for sure
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) Which of the following will not increase the value of a put option?
A) an increase in the time to maturity
B) a decrease in the stock price
C) a decrease in the stocks volatility
D) an increase in the exercise price
Dif: 1 Var: 1
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
10) Which of the following statements is FALSE?
A) Put-call parity gives the price of a European call option in terms of the price of a
European put, the underlying stock, and a zero-coupon bond.
B) For a given strike price, the value of a call option is higher if the current price of the
stock is higher, as there is a greater likelihood the option will end up in-the-money.
C) The value of an otherwise identical call option is higher if the strike price the holder
must pay to buy the stock is higher.
D) Because a put is the right to sell the stock, puts with a lower strike price are less
valuable.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
11) Which of the following statements is FALSE?
A) The intrinsic value of an option is the value it would have if it expired immediately.
B) A European option cannot be worth less than an identical American option.
C) Put options increase in value as the stock price falls.
D) A put option cannot be worth more than its strike price.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
27
12) Which of the following statements is FALSE?
A) Because an American option cannot be worth less than its intrinsic value, it cannot have
a negative time value.
B) An American option with a later exercise date is of more worth than an otherwise
identical American option with an earlier exercise date.
C) The value of an option generally decreases with the volatility of the stock.
D) The investor holding a short position in an option has an obligation; he or she takes the
opposite side of the contract to the investor who holds the long position.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
13) KD Industries stock is currently trading at $32 per share. Consider a put option on KD
stock with a strike price of $30. The intrinsic value of this put option is ________.
A) $0
B) -$2
C) $2
D) $30
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14) KD Industries stock is currently trading at $32 per share. Consider a put option on KD
stock with a strike price of $30. The maximum value of this put option is ________.
A) $0
B) $32
C) $30
D) $2
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28