Chapter 14 Options Markets 383 Chapter 14 Options Markets 1 A grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time A call option B put option C sale of a futures contract D purchase of a futures contract ANSWER A 2 A requires a premium above and beyond the price to be paid for the financial instrument A futures contract B call option C put option D call option and put option ANSWER D 3 A call option is in the money when the A market price of the underlying security exceeds the exercise price B market price of the underlying security equals the exercise price C market price of the underlying security is less than the exercise price D premium on the option is less than the exercise price ANSWER A 4 A put option is out of the money when the A market price of the underlying security exceeds the exercise price B market price of the underlying security equals the exercise price C market price of the underlying security is less than the exercise price D premium on the option is less than the exercise price ANSWER A 5 When the market price of the underlying security exceeds the exercise price the A call option is in the money B put option is in the money C call option is at the money D call option is out of the money ANSWER A 384 Chapter 14 Options Markets 6 When the exercise price exceeds the market price of the underlying security the A call option is in the money B put option is in the money C call option is at the money D put option is out of the money ANSWER B 7 Sellers writers of call options can offset their position at any point in time by A selling a put option on the same stock B buying identical call options C selling additional call options on the same stock D doing all of these ANSWER B 8 The is the most important exchange for trading options A New York Stock Exchange NYSE B Chicago Board of Options Exchange CBOE C Chicago Mercantile Exchange CME D Philadelphia Stock Exchange ANSWER B 9 execute transactions desired by investors and trade stock options for their own account A Floor brokers B Specialists C Market makers D None of these ANSWER C 10 A speculator buys a call option for 3 with an exercise price of 50 The stock is currently priced at 49 and rises to 55 on the expiration date The speculator will exercise the option on the expiration date if it is feasible to do so What is the speculator s profit per unit A 1 B 5 C 2 D 1 E 2 ANSWER C Chapter 14 Options Markets 385 11 A speculator buys a call option for 3 with an exercise price of 50 The stock is currently priced at 49 and rises to 55 on the expiration date What is the stock price at which the speculator would break even A 50 B 58 C 52 D 53 E 49 ANSWER D 12 A speculator purchases a put option for a premium of 4 with an exercise price of 30 The stock is presently priced at 29 and rises to 32 before the expiration date What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time A 4 B 3 C 2 D 2 E 3 ANSWER B 13 A speculator purchases a put option for a premium of 4 with an exercise price of 30 The stock is presently priced at 29 and rises to 32 before the expiration date What is the stock price at which the speculator would break even A 26 B 34 C 28 D 29 E 32 ANSWER A 14 The the higher the call option premium other things being equal A lower the existing price of the security relative to the exercise price B lower the variability of the security s market price C longer the maturity of the option D none of these ANSWER C 15 The the lower the premium on a put option other things being equal A higher the existing price of the security relative to the exercise price B greater the variability of the security s market value C longer the maturity of the option D none of these ANSWER A 386 Chapter 14 Options Markets 16 The longer the time to maturity the the call option premium and the the put option premium A higher lower B lower higher C higher higher D lower lower ANSWER C 17 The greater the volatility of the underlying stock the the call option premium and the the put option premium A higher lower B lower higher C higher higher D lower lower ANSWER C 18 The sale of a call option on a stock the seller already owns is referred to as A a covered call B a naked call C call on futures D futures on options ANSWER A 19 Assume a pension fund purchased stock at 53 Call options at a 50 exercise price presently have a 4 premium per share The pension fund sells a call option on the stock it owns If the call option is exercised when the price of the stock is 56 what is the gain or loss per share to the pension fund including its gain from holding the stock as well A 4 gain B 6 loss C 2 loss D 1 gain E 0 ANSWER D 20 Covered call writing the upside potential return and the risk of an investment in stock A increases increases B increases decreases C limits increases D limits decreases ANSWER D Chapter 14 Options Markets 387 21 Put options are typically used to hedge when portfolio managers are mainly concerned with a A permanent decline in a stock s value B permanent increase in a stock s value C temporary decline in a stock s value D temporary increase in a stock s value ANSWER C 22 A savings and loan association has long term fixed rate mortgages supported by short term funds A put option on Treasury bond futures could be used to ignore the premium paid for the option when you answer this question A maintain its interest rate spread if interest rates rise and increase its spread if interest rates fall B maintain its interest rate spread if interest rates fall and increase its spread if interest rates rise C maintain its interest rate spread whether interest rates rise or fall D increase its interest rate spread whether interest rates rise or fall ANSWER A 23 A speculator purchases a put option on Treasury bond futures with a September delivery date with a strike price of 85 00 The option has a premium of 2 00 Assume that the price of the futures contract decreases to 82 00 on the expiration date and the option is exercised at that point if it is feasible What is the …