INVESTMENT8THTESTBANKCHAP20

1、multiple choice questions1. 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 answer: e difficulty: easy 2. the price that the writer of a call option receives to sell the option is

2、called the a) strike price b) exercise price c) execution price d) acquisition price e) premium answer: e difficulty: easy 3. 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 answer:

3、 e difficulty: easy 4. 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 answer: a difficulty: easy 5. the price that the buyer of a call option pays for the underlying asset if she

4、 executes her option is called the a) strike price b) exercise price c) execution price d) a or c e) a or b answer: e 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 a) strike price b) exercise price c) e

5、xecution price d) a or b e) a or c answer: d difficulty: easy 7. 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) a or c e) a or b answer: e difficulty: easy 8. the price that t

6、he 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) a or b e) none of the above answer: e difficulty: easy 9. an american call option allows the buyer to a) sell the underlying asset at the exerc

7、ise 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) a and c. e) b and c. answer: e difficulty: easy rationale: an american call option may be exercised (allowing

8、the holder to buy the underlying asset) on or before expiration; the option contract also may be sold prior to expiration. 10. 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

9、 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) c and d. answer: e difficulty: easy rationale: a european call option may be exercised (allowing the holder to buy the underlying asset

10、) on the expiration date; the option contract also may be sold prior to expiration. 11. 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.

11、 c) potentially benefit from a stock price decrease with less risk than short selling the stock. d) b and c. e) a and c. answer: d difficulty: easy rationale: an american put option allows the buyer to sell the underlying asset at the striking price on or before the expiration date. the put option a

12、lso allows the investor to benefit from an expected stock price decrease while risking only the amount invested in the contract. 12. 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 stri

13、king price on or before the expiration date. c) potentially benefit from a stock price decrease with less risk than short selling the stock. d) sell the underlying asset at the striking price on the expiration date. e) c and d. answer: e difficulty: easy rationale: a european put option allows the b

14、uyer to sell the underlying asset at the striking price on or before the expiration date. the put option also allows the investor to benefit from an expected stock price decrease while risking only the amount invested in the contract. 13. an american put option can be exercised a) any time on or bef

15、ore 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 above. answer: a difficulty: easy rationale: american options can be exercised on or before expiration date. 14. an american call option can be exercised a)

16、 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 above. answer: a difficulty: easy rationale: american options can be exercised on or before expiration date. 15. a european call option c

17、an 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. e) none of the above. answer: b difficulty: easy rationale: european options can be exercised at expiration o

18、nly. 16. 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. e) none of the above. answer: b difficulty: easy rationale: european options

19、can be exercised at expiration only. 17. to adjust for stock splits a) the exercise price of the option is reduced by the factor of the split and the number of option 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 optio

20、n 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 option 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 option held is increased by that factor.

21、e) none of the above answer: a difficulty: easy 18. 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) a and b. e) a and c. answer: c difficulty: easy 19. the current market price of a share of at&t s

22、tock 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) a and c. e) b and c. answer: e difficulty: easy rationale: if the striking price on a call opt

23、ion is less than the market price, the option is in the money and sells for more than an out of the money option. 20. 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 fo

24、r a higher price than if the market price of boeing stock is $70. d) a and c. e) b and c. answer: e difficulty: easy rationale: if the striking price on a call option is less than the market price, the option is in the money and sells for more than an at the money option. 21. the current market pric

25、e 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) a and c. e) b and c. answer: e difficulty: easy rationale: if the striking p

26、rice on a call option is less than the market price, the option is in the money and sells for more than a less in the money option. 22. 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 a) is out of the money. b) is in the

27、money. c) can be exercised profitably. d) a and c. e) b and c. answer: a difficulty: easy rationale: if the striking price on a call option is more than the market price, the option is out of the money and cannot be exercised profitably. 23. the current market price of a share of cat stock is $76. i

28、f 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) a and c. e) b and c. answer: c difficulty: easy rationale: if the striking price on a call option is equal to the market price, the option is at the money. 24. a put o

29、ption 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 hi

30、gher than the price of the put. answer: b difficulty: easy rationale: an out of the money put option gives the owner the right to sell the shares for less than market price. 25. 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 exercis

31、e 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. answer: a difficulty: easy rationale: an in the money put option gives the owner the ri

32、ght to sell the shares for more than market price. 26. 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

33、than the price of the call. e) the price of the call is higher than the price of the put. answer: c difficulty: easy 27. 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 exercis

34、e 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. answer: a difficulty: easy rationale: an out of the money call option gives the owner the right to buy the shares for more than market pric

35、e. 28. 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

36、 call is higher than the price of the put. answer: b difficulty: easy rationale: an in the money call option gives the owner the right to buy the shares for less than market price. 29. 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

37、 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. answer: c difficulty: easy 30. the current market price of a share of at&t

38、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) a and c. e) b and c. answer: d difficulty: easy rationale: if the striking price on a put option

39、 is more than the market price, the option is out of the money and sells for less than an in the money option. 31. 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 h

40、igher price than if the market price of boeing stock is $70. d) a and c. e) b and c. answer: a difficulty: easy rationale: if the striking price on a put option is more than the market price, the option is out of the money and sells for less than an at the money option. 32. the current market price

41、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) a and c. e) b and c. answer: d difficulty: easy rationale: if the striking

42、price on a put option is less than the market price, the option is out of the money and sells for less than an in the money option. 33. 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 a) is out of the money. b) is in the mo

43、ney. c) can be exercised profitably. d) a and c. e) b and c. answer: a difficulty: easy rationale: if the striking price on a put option is less than the market price, the option is out of the money. 34. the current market price of a share of cat stock is $76. if a put option on this stock has a str

44、ike price of $80, the put a) is out of the money. b) is in the money. c) can be exercised profitably. d) a and c. e) b and c. answer: e difficulty: easy rationale: if the striking price on a put option is less than the market price, the option is in the money and can be profitably exercised. 35. loo

45、kback options have payoffs that a) have payoffs that depend in part on the minimum or maximum price of the underlying asset during the life of the option. b) have payoffs that only depend on the minimum price of the underlying asset during the life of the option. c) have payoffs that only depend on

46、the maximum price of the underlying asset during the life of the option. d) are known in advance. e) none of the above. answer: a difficulty: easy 36. 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) dep

47、end both on the assets price at expiration and on whether the underlying assets 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. e) none of the above. answer: a difficulty: ea

48、sy 37. currency-translated options have a) only asset prices denoted in a foreign currency. b) only exercise prices denoted in a foreign currency. c) have 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 i

49、n a foreign currency. e) none of the above. answer: d difficulty: easy 38. 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) a and b only

50、. e) a, b, and c. answer: e difficulty: easy 39. 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 above. answer: c difficulty: ea

51、sy rationale: if an option expires worthless all the buyer has lost is the price of the contract (premium). 40. 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) th

52、e stock price. e) none of the above. answer: c difficulty: easy rationale: if an option expires worthless all the buyer has lost is the price of the contract (premium). 41. the lower bound on the market price of a convertible bond is a) its straight bond value. b) its crooked bond value. c) its conv

53、ersion value. d) a and c. e) none of the above answer: d difficulty: easy 42. 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 above. answer: b difficulty: moderate rationale

54、: if the buyer of the option elects to exercise the option and buy the stock at the exercise price, the seller of the option must go into the open market and buy the stock (in order to sell the stock to the buyer of the contract) at the current market price. theoretically, the market price of a stoc

55、k is unlimited; thus the writers potential loss is unlimited. 43. the intrinsic value of an out-of-the-money call option is equal to a) the call premium. b) zero. c) the stock price minus the exercise price. d) the striking price. e) none of the above. answer: b difficulty: easy rationale: the fact

56、that the owner of the option can buy the stock at a price greater than the market price gives the contract an intrinsic value of zero, and the holder will not exercise. 44. the intrinsic value of an at-the-money call option is equal to a) the call premium. b) zero. c) the stock price plus the exerci

57、se price. d) the striking price. e) none of the above. answer: b difficulty: easy rationale: the fact that the owner of the option can buy the stock at a price equal to the market price gives the contract an intrinsic value of zero. 45. the intrinsic value of an in-of-the-money call option is equal

58、to a) the call premium. b) zero. c) the stock price minus the exercise price. d) the striking price. e) none of the above. answer: c difficulty: easy rationale: the fact that the owner of the option can buy the stock at a price less than the market price gives the contract a positive intrinsic value

59、. 46. the intrinsic value of an in-the-money put option is equal to a) the stock price minus the exercise price. b) the put premium. c) zero. d) the exercise price minus the stock price. e) none of the above. answer: d difficulty: moderate rationale: the intrinsic value of an in-the-money put option

60、 contract is the strike price less the stock price, since the holder can buy the stock at the market price and sell it for the strike. 47. the intrinsic value of an at-the-money put option is equal to a) the stock price minus the exercise price. b) the put premium. c) zero. d) the exercise price minus the stock price