TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 15
STOCK OPTIONS MARKET
MULTIPLE CHOICE
1. In the U.S., options are traded on the:
[E]
2. Which of the following statement is most correct?
[M]
3. LEAPS are:
[M]
4. The Black-Scholes option pricing model:
5. If the price of a call option in the market is higher than that derived from the Black-
Scholes option pricing model, an investor could:
[M]
6. Of the five factors that influence the price of an option:
[M]
7. Hedging with options by taking a position in the underlying stock allows the investor to
lock in:
[M]
8. The Black-Scholes model is based on several restrictive assumptions, including:
[D]
9. Option strategies that do not involve an offsetting or risk-reducing position in either
another option or the underlying common stock is called:
10. To take advantage of an anticipated increase in the stock price while, at the same time,
limiting the maximum loss to the option, the investor will use a:
[M]
11. The most straightforward option strategy for benefiting from an expected decrease in the
price of some common stock while avoiding the unfavorable consequences should the
price rise is to follow a:
[M]
12. A long/call paper buying strategy involves:
[M]
13. If an investor wants to purchase a stock at a price less than the prevailing market price:
[M]
14. A covered or hedge strategy involves:
92
15. To protect the value of a stock held in a portfolio against the risk of a decline in the
market value, an investor would follow:
[M]
16. Strategies that combine two or more options on the same underlying stock, include:
[M]
17. A warrant, which gives the holder the right but not the obligation to buy a designated
number of shares at a specified price before a set date, is equivalent to:
[E]
18. Warrants differ from exchange-traded call options in that:
[M]
19. Which of the following is false?
20. To control portfolio risk, institutional investors us:
TRUE/FALSE
1. The most important use of options is to alter return distributions.
[E]
2. Investors use the options market to generate abnormal returns.
[E]
3. After considering transactions costs, the market for stock options appears to be efficient.
[E]
4. The binomial option pricing model can handle American call options.
[E]
5. The most popular model that has been developed to determine the theoretical value of an
option is the asset pricing model.
ESSAY QUESTIONS
1. Compare and contrast a warrant and an exchange-traded call option.
Key Issues:
2. Explain how a protective put buying strategy can protect the value of a stock in a
portfolio against the risk of a decline in market value.
Key Issues:
3. Explain the difference between naked strategies and covered (hedge) strategies.
Key Issues: