1
Fundamentals of Investing, 13e (Smart)
Chapter 14 Options: Puts and Calls
14.1 Learning Goal 1
1) Because puts and calls derive their value from the behavior of some other real or financial
asset, they are known as derivative securities.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2) Investors who purchase options acquire nothing more than the right to buy or sell the shares
of the underlying security.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) It is riskier to buy an option than to write an option.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
4) Puts and calls are issued by the same corporation that issued the underlying stock.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5) The owner of a put is obliged to sell the underlying security at the strike price on the date of
expiration.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2
6) Rights are call options issued to current owners of the stock and normally expire within a
short period of time.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Options allow investors to speculate on price movements without a large initial investment.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
8) The writer of an option creates the option by selling it.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
9) The buyer of a call option has the right to any dividends paid after the option was purchased,
but only if the option is exercised.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
10) Warrants are short-term options usually expiring within a year or less.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
11) Warrants are options, often attached to bond issues ,to make the bonds more attractive to
investors.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
12) Rights and warrants are the riskiest types of options.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
13) Purchasers of stock options
A) own a financial asset with benefits of firm ownership.
B) have a claim on the profits of the firm issuing the underlying securities.
C) have the obligation to buy or sell a predetermined amount of shares at the strike price.
D) have the right to buy or sell a certain number of underlying shares.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
14) Which one of the following statements concerning options is correct?
A) One option covers 1,000 shares of stock.
B) A put gives the option holder the right to buy a stated amount of securities.
C) The owner of a call is entitled to the dividends paid on the underlying shares of stock.
D) Option holders can profit on movements of the price of the underlying security.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4
15) An American call option gives the owner
A) the right to buy or sell the stock at the strike price on or before the expiration date.
B) the right but not the obligation to buy the stock at the strike price on or before the expiration
date.
C) the right and the obligation to buy the stock at the strike price on or before the expiration
date.
D) the right but not the obligation to sell the stock at the strike price on or before the expiration
date.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
16) Which of the following statements concerning put options are correct?
A) The writer of a put profits if the price of the underlying stock rises.
B) The writer of a put profits if the price of the underlying stock falls.
C) The owner of a put profits if the price of the underlying stock rises.
D) Both the owner and writer of a put profit when the price of the underlying stock falls.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
17) Which of the following is true about rights?
A) They are usually attached to bonds as a “sweetener.”
B) The owner has several years in which to exercise the option.
C) They are a type of short-lived call option.
D) They are a type of short-lived put option.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5
18) The writer of a put or call is the
A) the institution that brings buyers and sellers of an option together in a transaction.
B) can limit risk by letting the option expire unexercised.
C) party who creates an option by selling it.
D) party who guarantees that the terms of the option will be satisfied.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
19) Writers of option contracts
A) have a limited liability specified in the contract.
B) hope to exercise the option on favorable terms.
C) earn a commission no matter what subsequently happens to the contract.
D) earn a profit when the option expires without being exercised.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
20) One reason that writing options can be a viable and profitable investment strategy is that
A) the option writer collects the quarterly dividends.
B) most options expire unexercised.
C) an option writer determines when the option is exercised.
D) an option writer can exercise the option to avoid a potential loss.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
6
21) The ability to obtain a given equity position at a reduced capital investment, and therefore
magnify returns, is known as
A) leverage.
B) straddling.
C) hedging.
D) triple witching.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
22) LEAPS are a special type of option
A) that must be exercised within six months.
B) that can only be exercised on the expiration date.
C) that cannot be exercised for at least a year after it is is purchased.
D) that may have an expiration date as long as three years.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
23) Warrants are generally created when
A) a firm decides to execute a stock split.
B) the issuing corporation decides to sweeten a bond issue.
C) a LEAP expires and automatically converts.
D) a financial institution decides to create them based on market conditions.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7
24) LEAPS is an acronym for
A) Lehman and Ellsworth Authority Strips.
B) Liability & Equity Asset Securities.
C) LYONS Earnings Anticipation Stocks.
D) Long-Term Equity Anticipation Securities.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
25) Warrants
A) provide substantially less capital appreciation potential than the underlying stock.
B) tend to be quite costly.
C) have a stipulated price and an expiration date.
D) are not traded in the secondary markets because of their low unit costs.
Answer: C
Learning Outcome: F-01 Describe the different financial markets and the role of the financial
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
14.2 Learning Goal 2
1) An options strike price is the stock price at which the option holder breaks even.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) American style options can only be exercised on their expiration dates.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8
3) The party that accepts the legal obligation to stand behind the option is the buyer of the
contract.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
4) A listed option’s ask price is always higher than its bid price.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
5) Listed options are difficult to sell in the secondary market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
6) The majority of today’s options are stock options traded primarily on the CBOE and on
AMEX.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7) Technically, listed options expire on the Saturday following the third Friday of the expiration
month.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9
8) European options can only be exercised on the expiration date but can be sold to another
investor on any trading day.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9) Standardized options expire on the last business day of the expiration month.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10) The buyer of a listed American option has which of the following rights?
I. the right to change the expiration date
II. the right to change the strike price
III. the right to resell the option
IV. the right to let the option expire unexercised
A) I and III only
B) III and IV only
C) I, III and IV only
D) II, III and IV only
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10
11) The writer of a put option hopes that the price of the underlying stock will rise because
A) the option is more likely to be exercised.
B) the option is less likely to be exercised.
C) the buyer of the put will have to purchase the stock at a higher price.
D) the value of the put option will increase in the secondary market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
12) Which of the following is a possible official expiration date for a standardized option
contract?
A) Saturday, October 17
B) Monday, March 1
C) Friday, April 30
D) Wednesday, May 19
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
13) Which one of the following was the first listed exchange for stock options in the United
States?
A) Stock Index Board
B) Philadelphia Board of Trade
C) New York Stock Exchange
D) Chicago Board Options Exchange
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2