In order for put – call parity to hold the cash flows of both the portfolios must be identical. The above
conditions must be met to ensure that the cash flows of the two portfolios are matched.
58. An investor that writes a covered call
a.
receives a premium for the option he sells.
b.
speculates that the stock price will increase above the strike price
c.
benefits if the stock price increases above the strike price.
d.
pays a premium to the call seller for downside protection on his stock
59. The main difference between an American and a European option is that
a.
European options are priced in Euros and American options are priced in dollars.
b.
American options can be exercised at any time until expiration while European options
can only be exercised on expiration date
c.
European options can be exercised at any time until expiration while American options
can only be exercised on expiration date
d.
American options are standardized contracts while European options are not.
60. Kenly Bennett XIV wants to short shares of Axline Industries. However his broker can not find shares
available to short. To synthetically produce a short strategy on Axline Industries, Kenly could
a.
Buy a put, sell a zero coupon bond with a face value equal to the strike price of the put and
the call, and sell a call.
b.
Buy a put, sell a zero coupon bond with a face value equal to the strike price of the put and
the call, and buy a call.
c.
Sell a put, buy a zero coupon bond with a face value equal to the strike price of the put and
the call, and sell a call.
d.
Buy a put, buy a zero coupon bond with a face value equal to the strike price of the put
and the call, and sell a call.
61. Shares of Beech Brewery, Inc. trade at $35. Call options with a strike price of $30 trade for $7.50. The
options have 1 year until expiration and the risk free rate is 4%. According to put – call parity what
should be the price of a $30 put option on Beech Brewery with one year to expiration.
a.
$6.15
b.
$6.36
c.
$1.35
d.
$11.15
62. Jim Lemke purchases a put option on Roofus Corp. for $3.50. The put option has a 1 year expiration
and a strike price of $35. Currently Roofus Corp. is trading at $38. What is Lemke’s maximum loss on
the put option?
a.
$38
b.
$35
c.
$3.50
d.
$31.50
63. Bill Henricksen, purchased a put option on Cycle Inc. for $4. The put option has a strike price of $40
and currently Cycle Inc. shares trade for $44. The expiration date of the option is 6 months from today.
What is Henricksen’s maximum gain on his put option?
a.
$4
b.
$36
c.
$40
d.
$44
64. Which of the following option positions has a loss potential that is unlimited.
a.
a long call
b.
a naked short call
c.
a short put
d.
a long straddle
65. Drewfus Corp. is currently trading at $30. Call options with a strike price of $25 and 6 months to
expiration are trading at $7 and call options with a strike price of $35 and 6 months to expiration are
trading at $2. If Investor Andy Reutter buys a $25 call and simultaneously sells a $35 call what is his
maximum gain on the position.
a.
$10
b.
unlimited
c.
$3
d.
$5
66. A call option on Dani Corp. is trading for $4.50. The strike price of the option is $25 and it has an
expiration of 3 months. If the stock of Dani Corp. is trading at $28, how much of the option premium
is attributed to intrinsic value?
a.
$1.50
b.
$3.00
c.
$25
d.
$28
67. Hannah Monstz is looking to purchase a call option on Thomas Co., which is currently trading at $35.
The call option has a strike price of $32.50 and has 6 months to expiration. If the options has a
premium of $5, what is Hannah’s maximum loss on the position?
a.
$5
b.
$2.50
c.
$32.50
d.
$35
68. Stanley Saeli is an investor who is bullish on LSL Corporation. Currently, LSL Corp. is trading at $51.
To profit from his position, Saeli decides to sell put options on LSL Corp. that have a strike price of
$45 and 1 year until expiration. The premium that he would receive on the option is $2.50. What is the
most that Saeli can expect to gain per put option?
a.
$6
b.
$45
c.
$2.50
d.
$42.50
69. All of the following options are call options on Nixon Industries, which currently is trading at $35.
They all have the same expiration date. Which of the following options should trade at the highest
price.
a.
A call option with a strike price of 20
b.
A call option with a strike price of 30
c.
A call option with a strike price of 40
d.
A call option with a strike price of 50
70. All of the following options are put options with 9 months to expiration on Mac Industries. Which of
the following options should trade at the lowest premium?
a.
A put option with a strike price of 65
b.
A put option with a strike price of 55
c.
A put option with a strike price of 40
d.
A put option with a strike price of 45
71. Which of the following factors will affect the price of an option?
a.
The strike price of the option
b.
The amount of time until expiration
c.
The price of the underlying stock
d.
All of the above
72. Jimmy Campbell is looking to buy put options on Hawkwood Corporation. Currently Hawkwood
Corp. stock is trading at $40 per share. The put options that he is considering buying have a strike
price of $45. These put options are
a.
in-the-money
b.
American options
c.
out-of-the money
d.
European options
73. Which of the following would affect the premium of a call option?
a.
interest rates
b.
dividend yield
c.
stock price volatility
d.
all of the above
74. Ryan T. Gates buys a call option on Hoste Enterprise for $3. The call option has a strike price of $35
and 6 months to expiration. If the price of Hoste Enterprise is $33 in 6 months how much is the call
option worth at expiration.
a.
$3
b.
$2
c.
$-2
d.
$0
75. Rico Pagano holds the stock of Nosbitzh & Company. Pagano is concerned that over the next 6
months the stock of Nozbitzh & Co. may fall by 20%. To protect the value of his position, Pagano
could
a.
sell a naked call
b.
buy a protective put
c.
sell a protective put
d.
buy a call
76. Lauri Mazurek buys a call option on Piede Inc. Currently Piede Inc. trades at $65 per share. The call
option she buys has a strike price of $70 and has a premium of $4. What is Mazurek’s breakeven
price?
a.
$66
b.
$70
c.
$69
d.
$74
77. Kimball Johnson has just purchased a put option on Reut Corporation which currently trades at $58
per share. The put option has a strike price of $50, 6 months until expiration, and trades at a premium
of $3. What is the breakeven price for Johnson’s put option.
a.
$47
b.
$53
c.
$55
d.
$61
78. Thomas Duckworth owns and operates Stones Asset Management. The firm manages $10 billion in
assets and focuses on exploiting arbitrage opportunities. Duckworth uses put – call parity to price put
and call options. According to his put – call parity analysis Duckworth realizes that puts with a strike
price of $30 and 1 month remaining until expiration on Medusa’s Inc. should be priced at $2.30.
However he realizes that the $30 puts are trading for $2.75 in the open market. How should
Duckworth exploit this arbitrage opportunity?
a.
sell the puts in the open market, buy Medusa’s stock, short a zero coupon bond with a face
value of $30 and maturity of 1 month, and buy a 1 month call with a strike price of $30
b.
buy the puts in the open market, short Medusa’s stock, short a zero coupon bond with a
face value of $30 and maturity of 1 month, and buy a 1 month call with a strike price of
$30
c.
sell the puts in the open market, lend $30 at the risk free rate, buy a 1 month $30 call on
Medusa’s, and short the underlying stock.
d.
buy a zero coupon bond with a face value of $30 and maturity of 1 month and buy a 1
month call with a strike price of $30
79. An investor who employs a short straddle strategy is hoping that the underlying stock price
a.
is extremely volatile
b.
is stable
c.
trends above the strike price of the options
d.
trends below the strike price of the options
80. Meri Beth Rank believes that stock of Opp & Company is going to be extremely volatile over the next
month. Meri Beth expects the stock to move by 50% but she is not sure whether the stock of Opp &
Company will rise or fall. A possible strategy that Meri Beth could employ to profit from her
expectation is
a.
a long straddle
b.
a short straddle
c.
a short call
d.
a short put
81. Which of the following statements is true?
a.
When one writes a naked call option it means they do not own shares of the underlying
stock.
b.
When one writes a naked call option it means they do own shares of the underlying stock.
c.
Buying or selling naked options is an example of hedging.
d.
Buying or selling naked options is an example of speculation.
e.
Both (a) and (d) are true.
82. Put-call parity says that the price on a portfolio of ____ must equal the price of a portfolio of ____.
a.
a bond and call option; one share of common stock and one put option.
b.
one share of common stock and a call option; a bond and one put option.
c.
one share of preferred stock and a bond; a call option and one put option
d.
one put option and one share of preferred stock; a bond and one call option
83. The idea behind the Binomial Model is that:
a.
Investors can combine options with a risk-free asset to construct a portfolio with the same
payoff as the underlying asset.
b.
Investors can combine options with shares of the underlying asset to construct a portfolio
with a risky payoff.
c.
Investors can form a portfolio of a bond and call option which should equal the payoff of a
portfolio comprised of one share of common stock and one put option.
d.
Investors can combine options with shares of the underlying asset to construct a portfolio
with a risk-free payoff.
84. Which of the following statements regarding the Binomial Model is true?
a.
It makes assumptions about the volatility of the underlying stock.
b.
The first step is forming a risk-free portfolio.
c.
The objective of the portfolio is to generate the same cash payment in the future regardless
of whether the value of the stock rises or falls.
d.
All of the above
e.
Only (b) and (c) are true.
85. Which of the following is NOT needed to price options using the binomial approach?
a.
the current price of the underlying stock
b.
the risk-free rate
c.
the possible values that the underlying stock could take in the future
d.
the strike price of the option
e.
the value of N(d1)
86. Which of the following statements regarding the Binomial Model is false?
a.
It requires that we make assumptions about the probabilities of up and down movements
in the underlying stock’s price.
b.
More complex versions of the binomial model can accommodate a wide range of final
stock values.
c.
It prices options through the principle of ‘no arbitrage.’
d.
It argues that the value of identical assets should be selling at identical prices.
87. One key difference between the Black and Scholes (B&S) option pricing model and the binomial
model is that the B&S model assumes the ____ is known whereas the binomial model does not.
a.
current market value of the underlying asset
b.
annual risk-free rate
c.
strike price
d.
time until expiration
e.
standard deviation of the underlying asset
88. Employee stock options are typically ____ when they are issued.
a.
in the money
b.
out of the money
c.
at the money
d.
for the money
89. Which of the following statements regarding employee stock options (ESO) is false?
a.
Most ESOs are at the money when issued.
b.
They are typically issued with only a few months until expiration.
c.
Many firms do not let employees exercise their options until a vesting period has passed.
d.
ESOs are most valuable when the price of the underlying asset is well above the stock
price.
90. Warrants attached to another security offering that give investors more upside potential are known as:
a.
convertible bonds
b.
kicker values
c.
equity kickers
d.
up warrants
e.
convertible warrants
91. Considering the following information what is the value of the put?
Current Stock Price
65
Possible up price
70
Possible down price
50
Risk-free rate
0.04
Put Strike
55
a.
$0.58
b.
$3.42
c.
$2.69
d.
$29.17
92. Considering the following information what is the value of the call?
Current Stock Price
65
Possible up price
70
Possible down price
50
Risk-free rate
0.04
Call Srrike
55
a.
$2.84
b.
$12.69
c.
$11.01
d.
$2.88
Stock value up
70
Stock value down
50
Call Value Up
15
Call Value down
Future call port
50
less stock
Call value
Stock value up
70
Stock value down
50
Put Value Up
Put Value Down
h
Future put port
70
PV of port
less stock
Put value
93. Considering the following information what is the value of the call?
Current Stock Price
60
Possible up price
70
Possible down price
55
Risk-free rate
0.03
Call Srrike
57
a.
$5.72
b.
$8.09
c.
$11.67
d.
$4.17
94. Considering the following information what is the value of the put?
Current Stock Price
60
Possible up price
70
Possible down price
55
Risk-free rate
0.03
Put Strike
57
a.
$2.04
b.
$6.44
c.
$1.06
d.
$8.54
Stock value up
70
Stock value down
55
Put Value Up
Put Value Down
h
Future put port
70
PV of port
less stock
Stock value up
70
Stock value down
55
Call Value Up
13
Call Value down
h
Future call port
55
less stock
Call value
95. Considering the following information what is the value of the put?
Current Stock Price
25
Possible up price
27
Possible down price
21
Risk-free rate
0.05
Put Strike
22
a.
$0.12
b.
$5.88
c.
$1.29
d.
$36.00
Stock value up
27
Stock value down
21
Put Value Up
Put Value Down
h
Future put port
27
PV of port
less stock
Put value
96. Considering the following information what is the value of the call?
Current Stock Price
25
Possible up price
27
Possible down price
21
Risk-free rate
0.05
Call Strike
22
a.
$7.50
b.
$4.38
c.
$4.17
d.
$4.00
Stock value up
27
Stock value down
21
Call Value Up
Call Value down
97. Considering the following information what is the value of the put?
Current Stock Price
40
Possible up price
49
Possible down price
38
Risk-free rate
0.03
Put Strike
42
a.
$0.00
b.
$2.75
c.
$1.43
d.
$6.28
Stock value up
49
Stock value down
38
Put Value Up
Put Value Down
h
2.75
Future put port
49
PV of port
less stock
Put value
98. Considering the following information what is the value of the call?
Current Stock Price
40
Possible up price
49
Possible down price
38
Risk-free rate
0.03
Put Strike
42
a.
$11.88
b.
$9.61
c.
$4.61
d.
$1.98
Future call port
21
20
less stock
Call value
