Essentials of Investments, 11e (Bodie)
1) You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You
hold the option until the expiration date, when MBI stock sells for $123 per share. You will
realize a ________ on the investment.
A) $200 profit
B) $200 loss
C) $300 profit
D) $300 loss
2) You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You
hold the option until the expiration date, when MBI stock sells for $123 per share. You will
realize a ________ on the investment.
A) $200 profit
B) $200 loss
C) $500 profit
D) $500 loss
3) You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You
hold the option until the expiration date, when MBI stock sells for $123 per share. You will
realize a ________ on the investment.
A) $300 profit
B) $300 loss
C) $500 loss
D) $200 profit
4) You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You
hold the option until the expiration date, when MBI stock sells for $121 per share. You will
realize a ________ on the investment.
A) $300 profit
B) $200 loss
C) $600 loss
D) $200 profit
5) ______ option can only be exercised on the expiration date.
A) A Mexican
B) An Asian
C) An American
D) A European
6) All else the same, an American-style option will be ________ valuable than a ________ style
option.
A) more; European-
B) less; European-
C) more; Canadian-
D) less; Canadian-
7) At contract maturity the value of a call option is ________, where X equals the option’s strike
price and ST is the stock price at contract expiration.
A) max (0, ST − X)
B) min (0, ST − X)
C) max (0, X − ST)
D) min (0, X − ST)
8) At contract maturity the value of a put option is ________, where X equals the option’s strike
price and ST is the stock price at contract expiration.
A) max (0, ST − X)
B) min (0, ST − X)
C) max (0, X − ST)
D) min (0, X − ST)
9) An American put option gives its holder the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
10) An Asian call option gives its holder the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at a price determined by the average stock price during some
specified portion of the option’s life
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at a price determined by the average stock price during some
specified portion of the option’s life
11) An Asian put option gives its holder the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at a price determined by the average stock price during some
specified portion of the option’s life
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at a price determined by the average stock price during some
specified portion of the option’s life
12) A time spread may be executed by ________.
A) selling an option with one exercise price and buying a similar one with a different exercise
price
B) buying two options that have the same expiration dates but different strike prices
C) selling two options that have the same expiration dates but different strike prices
D) selling an option with one expiration date and buying a similar option with a different
expiration date
13) Which of the following statements about convertible bonds are true?
I. The conversion price does not change over time.
II. The associated stocks may not pay dividends as long as the bonds are outstanding.
III. Most convertibles are also callable at the discretion of the firm.
IV. They may be thought of as straight bonds plus a call option.
A) I and III only
B) I and IV only
C) I, II, and IV only
D) III and IV only
14) A quanto provides its holder with the right to ________.
A) participate in the payoffs from a portfolio of gambling casino stocks
B) exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
C) participate in the investment performance of a foreign security
D) exchange the payoff from a foreign investment for dollars at a fixed exchange rate
15) You purchase a call option on a stock. The profit at contract maturity of the option position is
________, where X equals the option’s strike price, ST is the stock price at contract expiration,
and C0 is the original purchase price of the option.
A) max (−C0, ST − X − C0)
B) min (−C0, ST − X − C0)
C) max (C0, ST − X + C0)
D) max (0, ST − X − C0)
16) Strips and straps are variations of ________.
A) straddles
B) collars
C) money spreads
D) time spreads
17) You write a put option on a stock. The profit at contract maturity of the option position is
________, where X equals the option’s strike price, ST is the stock price at contract expiration,
and P0 is the original premium of the put option.
A) max (P0, X − ST − P0)
B) min (−P0, X − ST − P0)
C) min (P0, ST − X + P0)
D) max (0, ST − X − P0)
18) Longer-term American-style options with maturities of up to 3 years are called ________.
A) warrants
B) LEAPS
C) GICs
D) CATs
19) The initial maturities of most exchange-traded options are generally ________.
A) less than 1 year
B) less than 2 years
C) between 1 and 2 years
D) between 1 and 3 years
20) A futures call option provides its holder with the right to ________.
A) purchase a particular stock at some time in the future at a specified price
B) purchase a futures contract for the delivery of options on a particular stock
C) purchase a futures contract at a specified price for a specified period of time
D) deliver a futures contract and receive a specified price at a specific date in the future
21) Exchange-traded stock options expire on the ________ of the expiration month.
A) second Monday
B) third Wednesday
C) second Thursday
D) third Friday
22) The writer of a put option ________.
A) agrees to sell shares at a set price if the option holder desires
B) agrees to buy shares at a set price if the option holder desires
C) has the right to buy shares at a set price
D) has the right to sell shares at a set price
23) Advantages of exchange-traded options over OTC options include all but which one of the
following?
A) ease and low cost of trading
B) anonymity of participants
C) contracts that are tailored to meet the needs of market participants
D) no concerns about counterparty credit risk
24) Each listed stock option contract gives the holder the right to buy or sell ________ shares of
stock.
A) 1
B) 10
C) 100
D) 1,000
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25) Exercise prices for listed stock options usually occur in increments of ________ and bracket
the current stock price.
A) $1
B) $5
C) $20
D) $25
26) You buy a call option and a put option on General Electric. Both the call option and the put
option have the same exercise price and expiration date. This strategy is called a ________.
A) time spread
B) long straddle
C) short straddle
D) money spread
27) In 1973, trading of standardized options on a national exchange started on the ________.
A) AMEX
B) CBOE
C) NYSE
D) CFTC
28) An American call option gives the buyer the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
29) A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current
stock price is $41. The put option is ________.
A) at the money
B) in the money
C) out of the money
D) knocked out
30) You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date
in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an
expiration date in July. This is called a ________.
A) time spread
B) long straddle
C) short straddle
D) money spread
31) A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of
Brocklehurst Corp. is $32. The call option is ________.
A) at the money
B) in the money
C) out of the money
D) knocked in
32) You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This
strategy is called a ________.
A) covered call
B) long straddle
C) naked call
D) money spread
33) You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date
in September, and you write a call option on Summit Corp. with an exercise price of $40 and an
expiration date in October. This strategy is called a ________.
A) time spread
B) long straddle
C) short straddle
D) money spread
34) A European call option gives the buyer the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
35) You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp.
This strategy is called a ________.
A) long straddle
B) naked put
C) protective put
D) short stroll
36) The value of a listed call option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.
A) II, III, and IV only
B) I, III, and IV only
C) I, II, and III only
D) I, II, III, and IV
37) The Option Clearing Corporation is owned by ________.
A) the exchanges on which stock options are traded
B) the Federal Deposit Insurance Corporation
C) the Federal Reserve System
D) major U.S. banks
38) The value of a listed put option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.
A) II only
B) II and IV only
C) I, II, and III only
D) I, II, III, and IV
39) The maximum loss a buyer of a stock call option can suffer is the ________.
A) call premium
B) stock price
C) stock price minus the value of the call
D) strike price minus the stock price
40) Which one of the statements about margin requirements on option positions is not correct?
A) The margin required will be lower if the option is in the money.
B) If the required margin exceeds the posted margin, the option writer will receive a margin call.
C) A buyer of a put or call option does not have to post margin.
D) Even if the writer of a call option owns the stock, the writer will have to meet the margin
requirement in cash.
41) A European put option gives its holder the right to ________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
42) The potential loss for a writer of a naked call option on a stock is ________.
A) equal to the call premium
B) larger the lower the stock price
C) limited
D) unlimited
43) A writer of a call option will want the value of the underlying asset to ________, and a buyer
of a put option will want the value of the underlying asset to ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
44) Buyers of listed options ________ required to post margins, and writers of naked listed
options ________ required to post margins.
A) are; are not
B) are; are
C) are not; are
D) are not; are not