Chapter 20 – Options Markets: Introduction
Chapter 20
Options Markets: Introduction
Multiple Choice Questions
1. The price that the buyer of a call option pays to acquire the option is called the
Difficulty: Easy
2. The price that the writer of a call option receives to sell the option is called the
Difficulty: Easy
3. The price that the buyer of a put option pays to acquire the option is called the
20-2
4. The price that the writer of a put option receives to sell the option is called the
D. acquisition price
E. strike price
Difficulty: Easy
5. The price that the buyer of a call option pays for the underlying asset if she executes her
option is called the
Difficulty: Easy
6. The price that the writer of a call option receives for the underlying asset if the buyer
executes her option is called the
Difficulty: Easy
20-5
13. An American put option can be exercised
Difficulty: Easy
14. An American call option can be exercised
Difficulty: Easy
15. A European call option can be exercised
Difficulty: Easy
20-6
16. A European put option can be exercised
Difficulty: Easy
17. To adjust for stock splits
Difficulty: Easy
18. All else equal, call option values are lower
Difficulty: Easy
20-7
19. All else equal, call option values are higher
Difficulty: Easy
20. The current market price of a share of AT&T stock is $50. If a call option on this stock
has a strike price of $45, the call
Difficulty: Easy
21. The current market price of a share of Boeing stock is $75. If a call option on this stock
has a strike price of $70, the call
Difficulty: Easy
20-8
22. The current market price of a share of CSCO stock is $22. If a call option on this stock has
a strike price of $20, the call
Difficulty: Easy
23. The current market price of a share of Disney stock is $30. If a call option on this stock
has a strike price of $35, the call
Difficulty: Easy
24. The current market price of a share of CAT stock is $76. If a call option on this stock has
a strike price of $76, the call
Difficulty: Easy
20-9
25. A put option on a stock is said to be out of the money if
Difficulty: Easy
26. A put option on a stock is said to be in the money if
Difficulty: Easy
27. A put option on a stock is said to be at the money if
Difficulty: Easy
20–10
28. A call option on a stock is said to be out of the money if
Difficulty: Easy
29. A call option on a stock is said to be in the money if
Difficulty: Easy
30. A call option on a stock is said to be at the money if
Difficulty: Easy
20–11
31. The current market price of a share of JNJ stock is $60. If a put option on this stock has a
strike price of $55, the put
Difficulty: Easy
32. The current market price of a share of a stock is $80. If a put option on this stock has a
strike price of $75, the put
Difficulty: Easy
33. The current market price of a share of a stock is $20. If a put option on this stock has a
strike price of $18, the put
Difficulty: Easy
20–12
34. The current market price of a share of MOT stock is $15. If a put option on this stock has
a strike price of $20, the put
Difficulty: Easy
35. The current market price of a share of PALM stock is $75. If a put option on this stock has
a strike price of $79, the put
Difficulty: Easy
36. The current market price of a share of AT&T stock is $50. If a put option on this stock has
a strike price of $45, the put
Difficulty: Easy
20–13
37. The current market price of a share of Boeing stock is $75. If a put option on this stock
has a strike price of $70, the put
Difficulty: Easy
38. The current market price of a share of CSCO stock is $22. If a put option on this stock has
a strike price of $20, the put
Difficulty: Easy
39. The current market price of a share of Disney stock is $30. If a put option on this stock
has a strike price of $35, the put
Difficulty: Easy
20–15
42. Barrier Options have payoffs that
Difficulty: Easy
43. Currency-Translated Options have
Difficulty: Easy
20–16
44. Binary Options
Difficulty: Easy
45. The maximum loss a buyer of a stock call option can suffer is equal to
Difficulty: Easy
46. The maximum loss a buyer of a stock put option can suffer is equal to
Difficulty: Easy
20–17
47. 47.The lower bound on the market price of a convertible bond is
Difficulty: Easy
48. The potential loss for a writer of a naked call option on a stock is
Difficulty: Moderate
49. The intrinsic value of an out-of-the-money call option is equal to
Difficulty: Easy
20–18
50. The intrinsic value of an at-the-money call option is equal to
Difficulty: Easy
51. The intrinsic value of an in-of-the-money call option is equal to
Difficulty: Easy
52. The intrinsic value of an in-the-money put option is equal to
Difficulty: Moderate
20–19
53. The intrinsic value of an at-the-money put option is equal to
Difficulty: Moderate
54. The intrinsic value of an out-of-the-money put option is equal to
Difficulty: Moderate
55. You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what
is the breakeven price of this position?
Difficulty: Easy
20–20
56. You purchase one JNJ 75 call option for a premium of $3. Ignoring transaction costs, the
break-even price of the position is
Difficulty: Easy
57. You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs,
what is the breakeven price of this position?
Difficulty: Easy
58. You purchase one IBM 70 call option for a premium of $6. Ignoring transaction costs, the
break-even price of the position is
Difficulty: Easy