week 7 McQ's Flashcards
Which of the following describes a call option?
Select one:
a. The right to buy an asset for a certain price
b. The obligation to buy an asset for a certain price
c. The obligation to sell an asset for a certain price
d. The right to sell an asset for a certain price
The right to buy an asset for a certain price
Which of the following describes a short position in an option?
Select one:
a. A position in an option lasting less than one month
b. A position where an option has been sold
c. A position in an option lasting less than three months
d. A position in an option lasting less than six months
A position where an option has been sold
Which of the following describes a long position in an option?
Select one:
a. A position where there is more than one year to maturity
b. A position where there is more than five years to maturity
c. A position where an option has been purchased
d. A position that has been held for a long time
A position where an option has been purchased
The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader’s net profit or loss?
Select one:
a. Loss of $1,000
b. Loss of $500
c. Gain of $1,500
d. Loss of $1,500
Gain of $1,500
A trader buys a call and sells a put with the same strike price and maturity date. What is the position equivalent to?
Select one:
a. A long forward
b. None of the above
c. Buying the asset
d. A short forward
A long forward
The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10. When does the trader make a profit?
Select one:
a. When the stock price is below $54
b. When the stock price is below $50
c. When the stock price is below $60
d. When the stock price is below $64
When the stock price is below $50
Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true?
Select one:
a. One of the options must be in the money
b. One of the options must be either in the money or at the money
c. It is possible for both options to be out of the money
d. It is possible for both options to be in the money
One of the options must be either in the money or at the money
When the stock price increases with all else remaining the same, which of the following is true?
Select one:
a. Calls increase in value while puts decrease in value
b. Puts increase in value while calls decrease in value
c. Both calls and puts decrease in value
Calls increase in value while puts decrease in value
When the strike price increases with all else remaining the same, which of the following is true?
Select one:
a. Puts increase in value while calls decrease in value
b. Both calls and puts decrease in value
c. Both calls and puts increase in value
d. Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
When volatility increases with all else remaining the same, which of the following is true?
Select one:
a. Both calls and puts decrease in value
b. Calls increase in value while puts decrease in value
c. Both calls and puts increase in value
d. Puts increase in value while calls decrease in value
Both calls and puts increase in value
When the time to maturity increases with all else remaining the same, which of the following is true?
Select one:
a. The value of European options either stays the same or increases
b. There is no effect on European option values
c. European options are liable to increase or decrease in value
d. European options always increase in value
European options are liable to increase or decrease in value
The price of a stock, which pays no dividends, is $30 and the strike price of a one year European call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?
Select one:
a. $3.98
b. $4.98
c. $5.98
d. $5.00
: $5.98
Which of the following best describes the intrinsic value of an option?
Select one:
a. The lower bound for the option’s price
b. The amount paid for the option
c. The Black-Scholes-Merton price of the option
d. The value it would have if the owner had to exercise it immediately or not at all
The value it would have if the owner had to exercise it immediately or not at all
Which of the following is true?
Select one:
a. An American call option on a stock should never be exercised early
b. An American call option on a stock should never be exercised early when no dividends are expected
c. There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
d. There is always some chance that an American call option on a stock will be exercised early
An American call option on a stock should never be exercised early when no dividends are expected
Which of the following is the put-call parity result for a non-dividend-paying stock?
Select one:
a. The European put price plus the stock price must equal the European call price plus the present value of the strike price
b. The European put price plus the present value of the strike price must equal the European call price plus the stock price
c. The European put price plus the stock price must equal the European call price plus the strike price
d. The European put price plus the European call price must equal the stock price plus the present value of the strike price
The European put price plus the stock price must equal the European call price plus the present value of the strike price
