Chapter 20 Flashcards by Matt Mitchell

The price that the buyer of a call option pays to acquire the option is called the

A. strike price.

B. exercise price.

C. execution price.

D. acquisition price.

E. premium.

E. premium

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The price that the writer of a call option receives to sell the option is called the

A. strike price.

B. exercise price.

C. execution price.

D. acquisition price.

E. premium.

E. premium

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The price that the buyer of a put option pays to acquire the option is called the

A. strike price.

B. exercise price.

C. execution price.

D. acquisition price.

E. premium.

E. premium

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The price that the writer of a put option receives to sell the option is called the

A. premium.

B. exercise price.

C. execution price.

D. acquisition price.

E. strike price.

A. premium

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The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

A. strike price.

B. exercise price.

C. execution price.

D. strike price or execution price.

E. strike price or exercise price.

E. strike price or exercise price

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The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

A. strike price.

B. exercise price.

C. execution price.

D. strike price or exercise price.

E. strike price or execution price.

D. strike price or exercise price

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The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

A. strike price.

B. exercise price.

C. execution price.

D. strike price or execution price.

E. strike price or exercise price.

E. strike price or exercise price

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The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

A. strike price.

B. exercise price.

C. execution price.

D. strike price or exercise price.

E. None of the options

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An American call option allows the buyer to

A. sell the underlying asset at the exercise price on or before the expiration date.

B. buy the underlying asset at the exercise price on or before the expiration date.

C. sell the option in the open market prior to expiration.

D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

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A European call option allows the buyer to

A. sell the underlying asset at the exercise price on the expiration date.

B. buy the underlying asset at the exercise price on or before the expiration date.

C. sell the option in the open market prior to expiration.

D. buy the underlying asset at the exercise price on the expiration date.

E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date

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An American put option allows the holder to

A. buy the underlying asset at the striking price on or before the expiration date.

B. sell the underlying asset at the striking price on or before the expiration date.

C. potentially benefit from a stock price increase.

D. sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

E. buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

B. sell the underlying asset at the striking price on or before the expiration date

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A European put option allows the holder to

A. buy the underlying asset at the striking price on or before the expiration date.

B. sell the underlying asset at the striking price on or before the expiration date.

C. potentially benefit from a stock price increase.

D. sell the underlying asset at the striking price on the expiration date.

E. potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

D. sell the underlying asset at the striking price on the expiration date

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An American put option can be exercised

A. any time on or before the expiration date.

B. only on the expiration date.

C. any time in the indefinite future.

D. only after dividends are paid.

E. None of the options

A. any time on or before the expiration date

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An American call option can be exercised

A. any time on or before the expiration date.

B. only on the expiration date.

C. any time in the indefinite future.

D. only after dividends are paid.

E. None of the options

A. any time on or before the expiration date

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A European call option can be exercised

A. any time in the future.

B. only on the expiration date.

C. if the price of the underlying asset declines below the exercise price.

D. immediately after dividends are paid.

B. only on the expiration date

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A European put option can be exercised

A. any time in the future.

B. only on the expiration date.

C. if the price of the underlying asset declines below the exercise price.

D. immediately after dividends are paid.

B. only on the expiration date

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To adjust for stock splits

A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.

B. the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor.

C. the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor.

D. the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor.

A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.

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All else equal, call option values are lower

A. in the month of May.

B. for low dividend payout policies.

C. for high dividend payout policies.

D. in the month of May and for low dividend payout policies.

E. in the month of May and for high dividend payout policies.

C. for high dividend payout policies

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All else equal, call option values are higher

A. in the month of May.

B. for low dividend payout policies.

C. for high dividend payout policies.

D. in the month of May and for low dividend payout policies.

E. in the month of May and for high dividend payout policies.

B. for low dividend payout policies

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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

A. is out of the money.

B. is in the money.

C. sells for a higher price than if the market price of AT&T stock is $40.

D. is out of the money and sells for a higher price than if the market price of AT&T stock is $40.

E. is in the money and sells for a higher price than if the market price of AT&T stock is $40.

E. is in the money and sells for a higher price than if the market price of AT&T stock is $40

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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

A. is out of the money.

B. is in the money.

C. sells for a higher price than if the market price of Boeing stock is $70.

D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70.

E. is in the money and sells for a higher price than if the market price of Boeing stock is $70.

E. is in the money and sells for a higher price than if the market price of Boeing stock is $70

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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

A. is out of the money.

B. is in the money.

C. sells for a higher price than if the market price of CSCO stock is $21.

D. is out of the money and sells for a higher price than if the market price of CSCO stock is $21.

E. is in the money and sells for a higher price than if the market price of CSCO stock is $21.

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The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call

A. is out of the money.

B. is in the money.

C. can be exercised profitably.

D. is out of the money and can be exercised profitably.

E. is in the money and can be exercised profitably.

A. is out of the money

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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

A. is out of the money.

B. is in the money.

C. is at the money.

D. None of the options

C. is at the money

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The current market price of a share of MOT stock is $24. If a call option on this stock has a strike price of $24, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options

C. is at the money

The current market price of a share of IBM stock is $195. If a call option on this stock has a strike price of $195, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options

C. is at the money

A put option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price

A put option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price

A put option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price

A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price

A call option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price

A call option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price

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 A. is in the money. B. is out of the money. C. sells for a lower price than if the market price of JNJ stock is $50. D. is in the money and sells for a lower price than if the market price of JNJ stock is $50. E. is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

E. is out of the money and sells for a lower price than if the market price of JNJ stock is $50

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 A. is in the money. B. is out of the money. C. sells for a lower price than if the market price of the stock is $75. D. is in the money and sells for a lower price than if the market price of the stock is $75. E. is out of the money and sells for a lower price than if the market price of the stock is $75.

E. is out of the money and sells for a lower price than if the market price of the stock is $75

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 A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $23. D. is out of the money and sells for a higher price than if the strike price of the put option was $23. E. is in the money and sells for a higher price than if the strike price of the put option was $23.

A. is out of th emoney

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 A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably

The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably

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 A. is out of the money. B. is in the money. C. sells for a lower price than if the market price of AT&T stock is $40. D. is out of the money and sells for a lower price than if the market price of AT&T stock is $40. E. is in the money and sells for a lower price than if the market price of AT&T stock is $40.

D. is out of the money and sells for a lower price than if the market price of AT&T stock is $40

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 A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70. E. is in the money and sells for a higher price than if the market price of Boeing stock is $70.

A. is out of the money

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 A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $25. D. is out of the money and sells for a higher price than if the strike price of the put option was $25. E. is in the money and sells for a higher price than if the strike price of the put option was $25.

A. is out of the money

The current market price of a share of Disney stock is $60. If a put option on this stock has a strike price of $65, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably

The current market price of a share of CAT stock is $76. If a put option on this stock has a strike price of $80, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably

Lookback options have payoffs that A. depend in part on the minimum or maximum price of the underlying asset during the life of the option. B. only depend on the minimum price of the underlying asset during the life of the option. C. only depend on the maximum price of the underlying asset during the life of the option. D. are known in advance.

A. depend in part on the minimum or maximum price of the underlying asset during the life of the option

Barrier options have payoffs that A. have payoffs that only depend on the minimum price of the underlying asset during the life of the option. B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. C. are known in advance. D. have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

Currency-translated options have A. only asset prices denoted in a foreign currency. B. only exercise prices denoted in a foreign currency. C. payoffs that only depend on the maximum price of the underlying asset during the life of the option. D. either asset or exercise prices denoted in a foreign currency.

D. either asset or exercise prices denoted in a foreign currency

Binary options A. are based on two possible outcomes—yes or no. B. may make a payoff of a fixed amount if a specified event happens. C. may make a payoff of a fixed amount if a specified event does not happen. D. may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes—yes or no. E. All of the options

E. All of the options

The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. None of the options

C. the call premium

The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. None of the options

C. the put premium

The lower bound on the market price of a convertible bond is A. its straight bond value. B. its crooked bond value. C. its conversion value. D. its straight bond value and its conversion value. E. None of the options

D. its straight bond value and its conversion value

The potential loss for a writer of a naked call option on a stock is A. limited. B. unlimited. C. larger the lower the stock price. D. equal to the call premium. E. None of the options

B. unlimited

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? A. $65 B. $75 C. $5 D. $70

A. $65 70 - 5

You purchase one JNJ 75 call option for a premium of $3. Ignoring transaction costs, the break-even price of the position is A. $75. B. $72. C. $3. D. $78.

D. $78 75 + 3

You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? A. $50 B. $55 C. $45 D. $40

C. $45 50 - 5

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is A. $194. B. $228. C. $206. D. $211.

C. $206 200 + 6

Call options on IBM listed stock options are A. issued by IBM Corporation. B. created by investors. C. traded on various exchanges. D. issued by IBM Corporation and traded on various exchanges. E. created by investors and traded on various exchanges.

E. created by investors and traded on various exchanges

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. Cannot tell without further information

D. decrease; decrease

The Option Clearing Corporation is owned by A. the Federal Reserve System. B. the exchanges on which stock options are traded. C. the major U.S. banks. D. the Federal Deposit Insurance Corporation.

B. the exchanges on which stock options are traded

A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

D. the purchase of a share of stock with a simultaneous sale of a call on that stock

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to A. the call value plus the present value of the exercise price plus the stock price. B. the call value plus the present value of the exercise price minus the stock price. C. the present value of the stock price minus the exercise price minus the call price. D. the present value of the stock price plus the exercise price minus the call price. E. None of the options

B. the call value plus the present value of the exercise price minus the stock price

A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. None of the options

A. a long put plus a long position in the underlying asset

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $504. B. decreases to $490. C. increases to $506. D. decreases to $496. E. None of the options

C. increases to $506 500 + 5 = $505 (breakdown)

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $204. B. decreases to $190. C. increases to $206. D. decreases to $196. E. None of the options

C. increases to $206 200 + 5 = $205 (breakeven)

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a money spread. D. a short straddle. E. None of the options

C. a money spread

You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as A. a vertical spread. B. a straddle. C. a time spread. D. a collar.

C. a time spread

Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call.

B. the actual call price minus the intrinsic value of the call

Which of the following factors affect the price of a stock option? A. The risk-free rate B. The riskiness of the stock C. The time to expiration D. The expected rate of return on the stock E. The risk-free rate, riskiness of the stock, and time to expiration

E. The risk-free rate, riskiness of the stock, and time to expiration

All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. None of the options

D. the expected rate of return on the stock

The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. None of the options

C. the stock price

The value of a stock put option is positively related to A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. the time to expiration and the striking price.

E. the time to expiration and the striking price

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy? A. $4,800 B. $200 C. $5,000 D. $5,200 E. None of the options

A. $4,800 -200 + 5000

You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy? A. $7,000 B. $400 C. $7,400 D. $6,600 E. None of the options

D. $6,600 - 400 + 7000

You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? A. $20,000 B. $20,600 C. $19,400 D. $19,000

D. $19,400 - 600 + 20,000

The price quotations were taken from the WSJ. The premium on one February 90 call contract is A. $3.1250. B. $318.00. C. $312.50. D. $58.00.

C. $312.50 3 1/8 = $3.125 × 100 = $312.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 90 call contract is A. $4.1250. B. $418.00. C. $412.50. D. $158.00.

C. $412.50 4 1/8 = $4.125 × 100 = $412.50.

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 85 call contract is A. $8.875. B. $887.50. C. $412.50. D. $158.00.

B. $887.50 8 7/8 = $8.875 × 100 = $887.50

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum potential profit of your strategy is ________ if both options are exercised. A. $600 B. $500 C. $200 D. $300 E. $100

C. $200 -100 - 5 = - 105; 2 + 105 = 107; 2 x 100 = $200

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be A. $500. B. $300. C. zero. D. $200.

C. zero $103 - $100 = $3 - ($5 - $2) = 0; $0 × 100 = $0.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is A. $200. B. $300. C. zero. D. $500.

B. $300 -$5 + $2 = -$3 × 100 = -$300

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even? A. $101 B. $102 C. $103 D. $104 E. None of the options

C. $103 x = $100 + $5 - $2; x = $103

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called A. a short straddle. B. a long straddle. C. a horizontal straddle. D. a covered call. E. None of the options

B. a long straddle

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be A. $500. B. $300. C. $800. D. $200. E. None of the options

C. $800 -$5 + (-$3) = -$8 × 100 = $800.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to A. $52. B. $60. C. $68. D. both $52 and $68. E. None of the options

D. both $52 and $68 Call: -$60 + (-$5) + $3 = $68 (break even); Put: -$3 + $60 + (-$5) = $52 (break even); thus, if price increases above $68 or decreases below $52, a profit is realized

The put-call parity theorem A. represents the proper relationship between put and call prices. B. allows for arbitrage opportunities if violated. C. may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. D. All of the options E. None of the options

D. All of the options

A collar with a net outlay of approximately zero is an options strategy that A. combines a put and a call to lock in a price range for a security. B. uses the gains from sale of a call to purchase a put. C. uses the gains from sale of a put to purchase a call. D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. E. combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call.

D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58? A. $10.00 B. $12.12 C. $16.00 D. $11.97 E. $14.13

D. $11,97 P = 10 - 53 + 58/(1.055); P = 11.97

HighFlyer Stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%. What is the price of a one-year put with strike price of $55? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $15.60

B. $12.89 P = 9 - 48 + 55/(1.06); P = 12.89

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $14.26

E. $14.26 P = 9 - 38 + 45/(1.04); P = 14.26.

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? A. $4.38 B. $5.60 C. $6.23 D. $12.26 E. None of the options

C. $6.23 C = 48 - [45/(1.04)] + 1.50; C = $6.23.

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? A. $17.50 B. $15.26 C. $10.36 D. $12.26 E. None of the options

B. $15.26 C = 103 - [100/(1.05)] + 7.50; C = $15.26.

Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them. B. a large contingent of investors holds them. C. the writers may choose whether or not to exercise them. D. their payoffs depend on the prices of other assets. E. contingency management is used in adding them to portfolios.

D. their payoffs depending on the prices of other assets

You purchased a call option for $3.45 17 days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return? A. 173.9%, -100% B. 73.9%, -100% C. 57.5%, -173.9% D. 73.9%, -57.5% E. 100%, -100%

B. 73.9% - 100% If the call is exercised the gross profit is $51 - 45 = $6. The net profit is $6 - 3.45 = $2.55. The holding period return is $2.55/$3.45 = .739 (73.9%). If the call is not exercised, there is no gross profit and the investor loses the full amount of the premium. The return is ($0 - 3.45)/$3.45 = -1.00 (-100%).

An option with an exercise price equal to the underlying asset's price is A. worthless. B. in the money. C. at the money. D. out of the money. E. theoretically impossible.

C. at the money

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher. A. more; more B. more; less C. less; more D. less; less E. It doesn't matter—they are too risky to be included in a reasonable person's portfolio.

B. more; less

What happens to an option if the underlying stock has a 2-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-half of what it was and the number of options held would double. D. The exercise price would double and the number of options held would double. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-half of what it was and the number of options held would double

What happens to an option if the underlying stock has a 3-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-third of what it was and the number of options held would triple. D. The exercise price would triple and the number of options held would triple. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-third of what it was and the number of options held would triple

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680 and the index is now at 1,720. What will happen when you exercise the option? A. You will have to pay $1,680. B. You will receive $1,720. C. You will receive $1,680. D. You will receive $4,000. E. You will have to pay $4,000.

D. You will receive $4,000 When an index option is exercised, the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 1,720 - 1,680 = 40 times the $100 multiplier, or $4,000. In other words, you are implicitly buying the index for 1,680 and selling it to the call writer for 1,720.

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,700 and the index is now at 1,760. What will happen when you exercise the option? A. You will have to pay $6,000. B. You will receive $6,000. C. You will receive $1,700. D. You will receive $1,760. E. You will have to pay $7,000.

B. You will receive $6,000 When an index option is exercised, the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 1,760 - 1,700 = 60 times the $100 multiplier, or $6,000. In other words, you are implicitly buying the index for 1,700 and selling it to the call writer for 1,760.