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68) You sell one MBI July 90 call contract for a premium of $4 and two puts for a premium of
$3 each. You hold the position until the expiration date, when MBI stock sells for $95 per share.
You will realize a ________ on this strip.
A) $300 profit
B) $100 loss
C) $500 profit
D) $200 profit
69) Which strategy benefits from upside price movement and has some protection should the
price of the security fall?
A) Bull spread
B) Long put
C) Short call
D) Straddle
70) What combination of puts and calls can simulate a long stock investment?
A) long call and short put
B) long call and long put
C) short call and short put
D) short call and long put
71) An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If
the current stock price is $35.10, what is the break-even point for the investor?
A) $32.50
B) $35
C) $37.50
D) $37.60
72) An investor is bearish on a particular stock and decided to buy a put with a strike price of
$25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-
even point for the investor?
A) $24.15
B) $25
C) $25.87
D) $27.86
73) Which of the following strategies makes a profit if the stock price stays stable?
A) long call and short put
B) long call and long put
C) short call and short put
D) short call and long put
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74) Which of the following strategies makes a profit when the stock price declines and loses
money when the stock price increases?
A) long call and short put
B) long call and long put
C) short call and short put
D) short call and long put
75) If you combine a long stock position with selling an at-the-money call option, the resulting
net payoff profile will resemble the payoff profile of a ________.
A) long call
B) short call
C) short put
D) long put
76) What strategy could be considered insurance for an investment in a portfolio of stocks?
A) covered call
B) protective put
C) short put
D) straddle
77) What strategy is designed to ensure a value within the bounds of two different stock prices?
A) collar
B) covered Call
C) protective put
D) straddle
78) You are convinced that a stock's price will move by at least 15% over the next 3 months.
You are not sure which way the price will move, but you believe that the results of a patent
hearing are definitely going to have a major effect on the stock price. You are somewhat more
bullish than bearish however. Which one of the following options strategies best fits this
scenario?
A) buy a strip.
B) buy a strap.
C) buy a straddle.
D) write a straddle.
79) When issued, most convertible bonds are issued ________.
A) deep in the money
B) deep out of the money
C) slightly out of the money
D) slightly in the money
80) A convertible bond is deep in the money. This means the bond price will closely track the
________.
A) straight debt value of the bond
B) conversion value of the bond
C) straight debt value of the bond minus the conversion value
D) straight debt value of the bond plus the conversion value
81) Warrants differ from listed options in that:
I. Exercise of warrants results in dilution of a firm's earnings per share.
II. When warrants are exercised, new shares of stock must be created.
III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does
not.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
82) Suppose you find two bonds identical in all respects except that bond A is convertible to
common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120.
Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity
of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is
(are) correct?
I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced
according to its straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the
current prices.
A) II only
B) I and III only
C) III only
D) I, II, and III
83) You find digital option quotes on jobless claims. You can buy a call option with a strike
price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price
and pays zero otherwise. The option costs $68. A second digital call with a strike price of
305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000
strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000.
Your net profit on the position is ________.
A) −$15
B) $200
C) $85
D) $185
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84) Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell
the stock this year due to tax reasons, but he is concerned that the stock will drop in value before
year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too
much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of
$2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the
collar and the stock price winds up at $35 in January, Bill's net position value including the
option profit or loss and the stock is ________.
A) $195,000
B) $220,000
C) $175,000
D) $215,000
85) You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip
before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-
money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is
________ than if you buy at-the-money puts and your maximum gain is ________.
A) greater; lower
B) greater; greater
C) lower; greater
D) lower; lower
86) You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1
split prior to the expiration date. You hold the option until the expiration date, when MBI stock
sells for $48 per share. You will realize a ________ on the investment.
A) $300 profit
B) $100 loss
C) $400 loss
D) $200 profit
87) You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6
months. You are considering using either puts or calls to hedge this position. Given this, which
of the following statements is (are) correct?
I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely, hedging with puts is probably better than hedging
with short calls.
A) I only
B) II only
C) I and III only
D) I, II, and III
88) At expiration of an option contract, which phrase describes the point at which both calls and
puts have the same gross profit?
A) at the money
B) in the money
C) out of the money
D) knocked in
89) If you anticipate a dramatic decline in stock prices, which naked strategy will make you the
most profit?
A) long call
B) long put
C) short call
D) short put
90) Why is the holder of an option not required to post margin under the Option Clearing
Corporation rules?
A) Once an option is purchased, no further money is at risk.
B) The seller pays all costs.
C) The credit worthiness of the holder covers all potential losses.
D) The holder must post securities instead of margin.
91) If the gross profit is positive and the net profit is negative, you will ________.
A) let the option expire with no action
B) not exercise the option
C) exercise the option
D) sell the option for less than the gross profit
