Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) For every owner of a call option there is also an option writer, the person who takes the other side.
2) Option are also called derivative assets because they derive their value solely from the price of another asset.
3) Standard stock options are traded and bought and sold through dealers only and cannot be bought via an
exchange.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
4) An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price
at some future date.
A) obligation, right
B) right, option
C) right, obligation
D) option, right
5) A call option gives the owner the right to ________ an asset at a fixed price at some future date.
A) sell
B) buy
C) hold
D) none of the above
6) A put option gives the owner the right to ________ an asset at a fixed price at some future date.
A) sell
B) buy
C) hold
D) none of the above
7) When a company writes a call option on new stock in the company, it is called a
A) convertible bond.
B) put option.
C) stock option.
D) warrant.
8) The price at which the holder of an option buys or sells a share of stock when the option is exercised is called
the ________ price.
A) strike
B) American
C) dilutive
D) none of the above
9) ________ options allow the holder to exercise the option on any date up to and including the expiration date.
A) Canadian
B) American
C) European
D) None of the above
10) ________ options allow the holder to exercise the option only on the expiration date.
A) Canadian
B) American
C) European
D) None of the above
11) The ________ side of an options contract has the option to exercise, while the ________ side has an obligation
to fulfill the contract.
A) long, long
B) short, long
C) long, short
D) short, short
12) The ________ is the total number of contracts of a particular option that have been written and not yet closed.
A) mark interest
B) open interest
C) turnover
D) local turnover
13) When the exercise price of an option is equal to the current price of the stock, the option is said to be
A) at–the–money.
B) in–the–money.
C) out–of–the–money.
D) none of the above
14) When the exercise price of a call option is higher than the current price of the stock, the option is said to be
A) at–the–money.
B) in–the–money.
C) out–of–the–money.
D) none of the above
15) When the exercise price of a call option is lower than the current price of the stock, the option is said to be
A) at–the–money.
B) in–the–money.
C) out–of–the–money.
D) none of the above
16) Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the
direction of the market or an asset is called ________.
A) hedging, speculation
B) hedging, verification
C) verification, hedging
D) speculation, hedging
17) Which of the following statements is FALSE?
A) A call option gives the owner the right to buy the asset.
B) A put option gives the owner the right to sell the asset.
C) A financial options contract gives the writer the right (but not the obligation) to purchase or sell an
asset at a fixed price at some future date.
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a
given price.
18) Which of the following statements is FALSE?
A) When a holder of an option enforces the agreement and buys or sells a share of stock at the
agreed–upon price, he is exercising the option.
B) There are two kinds of options. European options allow their holders to exercise the option on any date
up to and including a final date called the expiration date.
C) Because an option is a contract between two parties, for every owner of a financial option, there is also
an option writer, the person who takes the other side of the contract.
D) The price at which the holder buys or sells the share of stock when the option is exercised is called the
strike price or exercise price.
19) Which of the following statements is FALSE?
A) The option buyer, also called the option holder, holds the right to exercise the option and has a long
position in the contract.
B) The market price of the option is also called the exercise price.
C) If the payoff from exercising an option immediately is positive, the option is said to be in–the–money.
D) As with other financial assets, options can be bought and sold. Standard stock options are traded on
organized exchanges, while more specialized options are sold through dealers.
20) Which of the following statements is FALSE?
A) A holder would not exercise an in–the–money option.
B) The option seller, also called the option writer, sells (or writes) the option and has a short position in
the contract.
C) Because the long side has the option to exercise, the short side has an obligation to fulfill the contract.
D) When the exercise price of an option is equal to the current price of the stock, the option is said to be
at–the–money.
21) Which of the following statements is FALSE?
A) Options also allow investors to speculate, or place a bet on the direction in which they believe the
market is likely to move.
B) Options where the strike price and the stock price are very far apart are referred to as deep
in–the–money or deep out of–the–money.
C) Call options with strike prices above the current stock price are in–the money, as are put options with
strike prices below the current stock price.
D) European options allow their holders to exercise the option only on the expiration date–holders cannot
exercise before the expiration date.
22) The writer of a call option has
A) the obligation to sell a security for a given price.
B) the obligation to buy a security for a given price.
C) the right to sell a security for a given price.
D) the right to buy a security for a given price.
23) The holder of a put option has
A) the obligation to sell a security for a given price.
B) the right to buy a security for a given price.
C) the right to sell a security for a given price.
D) the obligation to buy a security for a given price.
24) Using options to reduce risk is called
A) speculation.
B) a naked position.
C) hedging.
D) a covered position.
25) Using options to place a bet on the direction in which you believe the market is likely to move is called
A) speculation.
B) hedging.
C) a covered position.
D) a naked position.
Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
26) Assume you want to buy one options contract that with an exercise price closest to being at–the–money and
that expires January 2009. The current price that you would have to pay for such a contract is:
A) $680
B) $380
C) $650
D) $420
27) The open interest for a January 2009 put option that is closest to being at–the–money is:
A) 7174
B) 982
C) 319
D) 8422
28) How many of the January 2009 put options are in–the–money?
A) 1
B) 3
C) 2
D) 4
29) How many of the January 2009 call options are in–the–money?
A) 2
B) 4
C) 1
D) 3
Use the table for the questions below
Consider the following information on options from the CBOE for Rackspace.
RAX 30.09 +0.48
12/3/2010
Bid 30.07
Ask 30.09
Calls
Last Sale
Net
Bid
Ask
Vol
Open Int
RAX 10 Dec 29
1.25
0
1.5
1.7
0
1436
RAX 10 Dec 30
1.05
0.27
0.95
1.1
5
2245
RAX 10 Dec 31
0.6
0.15
0.55
0.7
13
485
RAX 10 Dec 32
0.45
0
0.3
0.4
0
74
RAX 11 Jan 29
1.7
0
2.25
2.5
0
872
RAX 11 Jan 30
1.87
0.02
1.75
2
30
523
RAX 11 Jan 31
1.41
0.06
1.3
1.5
3
85
RAX 11 Jan 32
1.2
0
0.95
1.1
0
117
Puts
Last Sale
Net
Bid
Ask
Vol
Open Int
RAX 10 Dec 29
0.6
–0.2
0.5
0.7
1
750
RAX 10 Dec 30
1.19
0
0.95
1.1
0
521
RAX 10 Dec 31
2.05
0
1.55
1.7
0
31
RAX 10 Dec 32
0
0
2.15
2.5
0
0
RAX 11 Jan 29
1.85
0
1.45
1.7
0
1205
RAX 11 Jan 30
0
0
1.95
2.2
0
150
RAX 11 Jan 31
0
0
2.55
2.7
0
100
RAX 11 Jan 32
0
0
3.1
3.4
0
0
30) Assume you want to buy five call option contracts that with an exercise price closest to being at–the–money
and that expires December 2010. The current price that you would have to pay for such a contract is:
A) $550
B) $110
C) $475
D) $300
31) How many of the December 2010 put options are in–the–money?
A) 1
B) 2
C) 3
D) 4
32) The open interest for a January 2011 call option that is closest to being at–the–money is:
A) 1436
B) 2245
C) 872
D) 523
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
33) What are American options?
34) What are European options?
35) What is a call option?
36) What is a put option?
37) When is an option at–the–money?
38) When is an option in–the–money?
39) When is an option out–the–money?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
40) Although the payouts on a long position in an options contract are never negative, the profit from
purchasing and holding it could be negative.
41) When a stock price appreciates by a certain percentage, a call option on the same stock appreciates by a
lower percentage amount.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
42) Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a call option if the
option strike price is $20.
A) $20
B) $30
C) $40
D) $50
43) Suppose that a stock sells at a price of $10 on the expiration date. Compute the price of a call option if the
option strike price is $20.
A) $20
B) $30
C) $40
D) $0
44) Suppose that a stock sells at a price of $60 on the expiration date. Compute the price of a call option if the
option strike price is $20.
A) $20
B) $30
C) $40
D) $50
45) Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a put option if the
option strike price is $60.
A) $20
B) $30
C) $40
D) $50
46) Suppose that a stock sells at a price of $50 on the expiration date. Compute the price of a put option if the
option strike price is $80.
A) $20
B) $30
C) $40
D) $50
47) Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a put option if the
option strike price is $20.
A) $0
B) $10
C) $20
D) $30
48) Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a call
option if the option strike price is $20.
A) –$20
B) –$30
C) –$40
D) –$50
49) Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a call
option if the option strike price is $50.
A) –$20
B) –$10
C) 0
D) –$20
50) Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a call
option if the option strike price is $20.
A) –$20
B) –$30
C) –$40
D) –$50
51) Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a put
option if the option strike price is $20.
A) –$20
B) –10
C) 0
D) $40
52) Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a put
option if the option strike price is $50.
A) –$20
B) –10
C) 0
D) $40
53) Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a put
option if the option strike price is $80.
A) –$20
B) –10
C) 0
D) $40
54) Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the
stock is $30. What is the return on the call option if you hold your position until maturity?
A) 25%
B) 50%
C) 75%
D) 100%
55) Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the
stock is $40. What is the return on the call option if you hold your position until maturity?
A) 125%
B) 130%
C) 150%
D) 170%
56) Suppose you purchase a call option for $5 and a strike price of $40. On the expiration day, the price of the
stock is $55. What is the return on the call option if you hold your position until maturity?
A) 125%
B) 200%
C) 275%
D) 300%
57) An investor purchases a call option and its underlying stock on the same day. If the stock appreciates by
25%, the call option will appreciate by
A) more than 25%.
B) less than 25%.
C) exactly 25%.
D) none of the above
58) The payoff to the holder of a call option is given by:
A) C = max(S – K, 0)
B) C = min(K, 0)
C) C = max(K – S, 0)
D) C = min(K – S, 0)
59) The payoff to the holder of a put option is given by:
A) P = max(K – S, 0)
B) P= max(S – K, 0)
C) P = min(S – K, 0)
D) P = max(K, 0)