978-0134083308 Chapter 14 Part 2

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14) The option premium is

A) the market price of the option.

B) the amount by which the stock price is expected to move before the option expires.

C) the fee charged by the options exchanges for executing transactions.

D) the difference between the strike price and the underlying price of the security.

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15) The strike price of a put option is the price

A) an investor must pay for the options contract.

B) of the underlying stock at the time that the options contract is purchased.

C) at which the underlying stock can be sold.

D) at which the underlying stock can be bought.

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16) Quotations in an option chain will show

I. the most recent bid and ask prices of the option

II. puts and calls for the same expiration date.

III. the strike price.

IV. the highest and lowest price for the option in the previous month.

A) I, III and IV only.

B) I, II and III only

C) II, III and IV only.

D) I, II, III and IV

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17) Stocks options that trade in the January cycle will have contracts available that expire in

A) January, February, April, and July.

B) March, June, September, December.

C) January, February, March, and April.

D) each of the next 12 months.

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18) The two provisions which investors should carefully consider when evaluating stock

options are the

A) strike price and the exchange ratio.

B) time until expiration and the strike price.

C) leverage ratio and the time to maturity.

D) premium and the discount.

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19) For a call purchased on an organized security exchange, the strike price specifies the

A) contractual price at which each of the shares of the underlying stock can be bought.

B) prevailing market price of one share of the underlying stock.

C) cost of buying one option contact based on the value of the underlying stock.

D) intrinsic value of the offsetting put.

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20) For all practical purposes, listed stock options always expire

A) on the last business day of the expiration month.

B) on the first Monday of every calendar quarter.

C) on the third Friday of the expiration month.

D) three months from the date of the option purchase.

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14.3 Learning Goal 3

1) The buyer of a put expects the price of the underlying stock to rise.

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2) The value of a call increases as the price of the underlying security rises.

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3) The value of a put increases as the price of the underlying security rises.

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4) The buyer of a put and the writer of a call both profit if the price of the stock falls.

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5) The option premium is the price of the option.

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6) Investors buy options at the bid price and sell at the ask price.

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7) The price behavior of the underlying security is the primary determinant of the price of an

option.

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8) A put option has a strike price of $32. The current price of the stock is $34. The put option

is said to be “in-the-money.”

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9) Options premiums tend to be smaller as the time to expiration increases.

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10) Grant purchased one call on XYZ stock at an exercise price of $25. The market price of

XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a

share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the

option today and then sells the shares? Ignore all transaction-related costs.

A) $380

B) $480

C) $500

D) $600

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11) Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha

stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following

statements are true given this information?

I. Rex’s option is worth at least $100 today.

II. Rex’s option is worthless today.

III. Rex’s option has more value today than when he bought it.

IV. Rex’s option has less value today than when he bought it.

A) I and III only

B) I and IV only

C) II and III only

D) II and IV only

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12) In late November, Karen bought FIB February puts with a strike price of $25. The ask

price of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the

put is

A) $340.

B) $(340).

C) $(621).

D) $0.00.

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13) The most important factor affecting the market price of a put or call is the

A) market interest rate.

B) expiration date.

C) price behavior of the underlying common stock.

D) price behavior of the corresponding warrant.

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14) NZMA stock is currently selling for $128. Which of the following options is “in-the-

money”?

A) March 130 call

B) February 125 call

C) March 125 put

D) February 100 put

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15) Which of the following affect the value of puts and calls written on shares of common

stock?

I. price volatility of the underlying stock

II. current market price of the underlying stock

III. length of time until the option expiration date

IV. current market interest rate

A) I and II only

B) I, II and III only

C) II, III and IV only

D) I, II, III and IV

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16) Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the

market price of Delta have to be for Lew to break-even on his option investment? Ignore

transaction costs and taxes.

A) $22

B) $25

C) $28

D) cannot be determined from the information provided

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17) Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price

was $10. What does the market price of Echo have to be for Andrea to break-even on this

investment if the option is exercised? Ignore transaction construed taxes.

A) $10

B) $12

C) $8

D) cannot be determined from the information provided

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18) Jason purchased a six-month put on ABC stock at a cost of $100. The strike price was $15.

At what market price does Jason just break-even on this investment? Ignore transaction costs

and taxes.

A) $15

B) $16

C) $14

D) cannot be determined from the information provided

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19) Jamie wrote a nine-month put on Beta stock. The strike price was $25 and the market price

at the time the option was written was $24. The total price of the option contract was $150. At

what market price will Jamie just break-even on this investment? Ignore transaction costs and

taxes.

A) $23.50

B) $24.00

C) $25.00

D) $26.50

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20) A put has fundamental value as long as

A) the market price of the underlying financial asset has a positive value.

B) the market price of the underlying financial asset is less than the strike price.

C) the strike price of the put is greater than the time premium of the put.

D) the strike price of the put is less than the market value of the underlying asset.

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21) What is the intrinsic value of a call with a strike price of $40 a market price of $44? The

call’s ask price $540.

A) -$400

B) -$140

C) $940

D) $400

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22) Which of the following represent in-the-money options?

I. a call when the market price exceeds the strike price

II. a call when the strike price exceeds the market price

III. a put when the market price exceeds the strike price

IV. a put when the strike price exceeds the market price

A) I and III only

B) I and IV only

C) II and III only

D) II and IV only

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23) What is the time value of a put with a strike price of $30 when the option price is $500 and

the underlying common stock sells for $27?

A) $100

B) $200

C) $300

D) $400

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24) What is the fundamental value of a put contract with a strike price of $25 when the option

price is $1.50 and the underlying common stock sells for $26?

A) $150

B) $100

C) $0.00

D) -$100

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25) Nowel Inc. stock is currently priced at $42. The present value of the strike price of a call

option on this stock is $44. Probability one, as calculated by the Black Scholes option pricing

model is .6541; probability 2 is .3722. The value of this option as calculated by Black-Scholes

A) $(2.00).

B) $11.10.

C) $2.000.

D) $10.71.

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26) Which of the following increase(s) the time premium of a call option?

I. a market price that exceeds the strike price

II. increasing volatility in the market price of the underlying security

III. decreasing market interest rates

IV. decreasing the time to option expiration

A) II only

B) I and II only

C) III and IV only

D) II and III only

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