Chapter 09 – Derivatives: Futures, Options, and Swaps
61. The two parts that make up an option’s price are:
A. Extrinsic value and the time value of the option.
62. The intrinsic value of an option:
D. Cannot be determined without knowing the future price of the underlying asset.
63. As an option approaches its expiration date, the value of the option approaches:
D. Infinity.
Chapter 09 – Derivatives: Futures, Options, and Swaps
64. The time value of the option can best be defined as:
A. The commission earned by a broker.
65. Assume we have a stock currently worth $100. We also assume the interest rate is zero,
and we can buy options for this stock with a strike price of $100. If the stock can rise or fall
by $20 with equal probability over the option period, and the option cannot be exercised until
the expiration date, what is the time value of the option?
A. $20
66. Assume we have a stock currently worth $100. We also assume the interest rate is zero,
and we can buy options for this stock with a strike price of $100. If the stock can rise or fall
by $5 with equal probability over the option period, and the option cannot be exercised until
the expiration date, what is the time value of the option?
A. $10
Chapter 09 – Derivatives: Futures, Options, and Swaps
67. Assume we have a stock currently worth $50. We also assume the interest rate is zero, and
we can buy options for this stock with a strike price of $50. If the stock can rise or fall by $10
with equal probability over the option period, and the option cannot be exercised until the
expiration date, what is the time value of the option?
D. $40
68. As the volatility of the stock price increases, the time value of the option:
A. Decreases.
69. An option’s value will never be less than zero because:
A. The intrinsic value is always less than zero.
Chapter 09 – Derivatives: Futures, Options, and Swaps
70. The intrinsic value of an option:
A. Is the difference between the option price and the interest rate.
71. At expiration, the value of an option:
A. Is greater than the intrinsic value.
72. At expiration, the time value of an option:
A. Is equal to the intrinsic value.
Chapter 09 – Derivatives: Futures, Options, and Swaps
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73. The time value of the option should:
D. Approach infinity at expiration.
74. If the price of an underlying asset has a standard deviation of zero:
D. Options for this asset would have a time value of the option equal to the price of the asset.
75. Considering a put option; if the price of the underlying asset increases:
A. The value of the put option also increases.
Chapter 09 – Derivatives: Futures, Options, and Swaps
76. Considering a call option, if the price of the underlying asset decreases:
D. The value of the option increases.
77. Considering a put option, an increase in the strike price:
D. Makes the option worthless.
78. If we have a stock selling for $95.00 and a call option for this stock has a strike price of
$82.00 and an option price of $13.60:
A. The intrinsic value of the option is $0.60 and the time value of the option is $13.00.
Chapter 09 – Derivatives: Futures, Options, and Swaps
79. We have a stock selling for $90.00. There is a put option for this stock with a strike price
D. You cannot determine the intrinsic value or time value of the option since the strike price
is less than the underlying asset price.
80. For a given call option price, which of the following statements is correct?
D. As the strike price approaches the price of the underlying asset, the intrinsic value of the
option increases and the time value of the option decreases.
81. Which of the following would tend to decrease the size of the time value of the option?
Chapter 09 – Derivatives: Futures, Options, and Swaps
82. Interest-rate swaps are:
D. Agreements that allow both parties to convert floating interest rates to fixed interest rates.
83. A key use of interest-rate swaps is to:
84. The principal in an interest rate swap is:
A. Always transferred from the originator to the counterparty of the swap.
Chapter 09 – Derivatives: Futures, Options, and Swaps
85. Considering interest-rate swaps, the swap rate is:
D. A measure of overall risk in the economy.
D. A measure of the time value of the swap.
87. One key difference between swaps and option contracts is:
A. Swaps are derivative agreements and options are not.
Chapter 09 – Derivatives: Futures, Options, and Swaps
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88. The U.S. Government debt managers use interest-rate swaps primarily because:
D. They are required by law to keep the cost of borrowing to a minimum.
89. The primary risk in swaps is that:
D. High U.S. government deficits will limit the availability of swaps.
90. Standardization of derivative contracts:
A. Result in increased risk for the parties involved.
Short Answer Questions
Chapter 09 – Derivatives: Futures, Options, and Swaps
91. As the chapter points out, there have been many cases where derivatives have led to a lot
of abuse. If this is the case, why do derivatives exist?
92. Explain how an interest rate futures contract differs from an outright purchase of a bond.
93. What are the three main ways to categorize derivatives?
Chapter 09 – Derivatives: Futures, Options, and Swaps
94. Explain why a forward contract may actually carry more risk than a futures contract.
95. Explain why the two parties in a futures contract technically do not make a bilateral
agreement with each other.