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11
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.
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
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.
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
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
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
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.
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
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.
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
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.
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
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.
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
14.3 Learning Goal 3
1) The buyer of a put expects the price of the underlying stock to rise.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) The value of a call increases as the price of the underlying security rises.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) The value of a put increases as the price of the underlying security rises.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
4) The buyer of a put and the writer of a call both profit if the price of the stock falls.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
14
5) The option premium is the price of the option.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) Investors buy options at the bid price and sell at the ask price.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) The price behavior of the underlying security is the primary determinant of the price of an
option.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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."
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9) Options premiums tend to be smaller as the time to expiration increases.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
15
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16
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.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
19
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
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
20
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
is
A) $(2.00).
B) $11.10.
C) $2.000.
D) $10.71.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
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
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
