TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 11
INTRODUCTION TO OPTIONS MARKETS
MULTIPLE CHOICE
1. When an option grants the buyer the right to purchase the designated instrument from the
writer, it is referred to as a:
[M]
2. The option premium is the:
[D]
3. The price at which the asset may be bought or sold is called the:
[E]
4. An option, which may be exercised only at the expiration date, is called:
5. The maximum amount that an option buyer can lose is:
[M]
6. Options offer:
[D]
7. Options may be traded either on organized exchanges, such as the Chicago Board
Options Exchange, or in the:
[M]
8. Options traded in the OTC market are known as:
[M]
9. A major difference between options and futures is that:
10. The writer of a call option is said to be in a:
[M]
11. The option price is a reflection of the option’s:
[M]
12. On the expiration date, an option’s time premium:
[D]
13. When an option has intrinsic value, it is said to be:
[D]
14. As the price of the underlying asset increases, the price of a:
15. The longer the time to expiration, the:
[D]
16. The relationship between the call option price, the put option price, and the price of the
underlying asset is knows as:
[M]
17. More complex OTC options are called:
[M]
18. Hedging with futures lets a market participant lock in a price and thereby eliminates:
[M]
19. A put option can be used to hedge against:
20. The theoretical option price can be calculated using:
TRUE/FALSE
1. There are no margin requirements for the buyer of an option once the option price has
been paid in full.
[M]
2. Investors can use futures to protect against symmetric risk and options to protect against
asymmetric risk.
[M]
3. An out-of-the-money option has no intrinsic value.
[D]
4. An in-the-money option is profitable when exercised immediately.
[D]
5. The greater the expected volatility of the price of the underlying asset, the less an investor
would be willing to pay for the option, and the more the option writer would demand for
it.
ESSAY QUESTIONS
1. What are the major differences between a futures contract and an options contract?
Key Issues:
2. Discuss the factors that influence the option price.
Key Issues:
3. What are the basic components of the option price?
Key Issues: