Chapter 15 - Options Markets

Chapter 15
Options Markets

Multiple Choice Questions

1. You purchase one IBM July 120 call contract for a premium of 5. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. 200 profit
B. 200 loss
C. $00 profit
). $00 loss

2. You purchase one IBM July 125 call contract for a premium of 5. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. 200 profit
B. 200 loss
C. 500 profit
). 500 loss

$. You purchase one IBM July 120 put contract for a premium of $. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. $00 profit
B. $00 loss
C. 500 loss
). 200 profit

*. You #rite one IBM July 120 call contract for a premium of *. You hol! the option until
the e"piration !ate #hen IBM stock sells for 121 per share. You #ill reali%e a &&&&&& on the
in'estment.
(. $00 profit
B. 200 loss
C. +00 loss
). 200 profit

15-1
Chapter 15 - Options Markets
5. (,n- &&&&&& option can only .e e"ercise! on the e"piration !ate.
(. Me"ican
B. (sian
C. (merican
). /uropean

+. (ll else the same0 an &&&&&& style option #ill .e &&&&&& 'alua.le than a &&&&&& style
option.
(. (merican0 more0 /uropean
B. (merican0 less0 /uropean
C. (merican0 more0 Cana!ian
). (merican0 less0 Cana!ian

1. (t contract maturity the 'alue of a call option is &&&&&&&&&&& #here 2 e3uals the option4s
strike price an! 5
6
is the stock price at contract e"piration.
(. Ma",00 5
6
- 2-
B. Min,00 5
6
- 2-
C. Ma",00 2 - 5
6
-
). Min,00 2 - 5
6
-

7. (t contract maturity the 'alue of a put option is &&&&&&&&&&& #here 2 e3uals the option4s
strike price an! 5
6
is the stock price at contract e"piration.
(. Ma",00 5
6
- 2-
B. Min,00 5
6
- 2-
C. Ma",00 2 - 5
6
-
). Min,00 2 - 5
6
-

8. (n (merican put option 9i'es its hol!er the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

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Chapter 15 - Options Markets
10. (n (sian call option 9i'es its hol!er the ri9ht to &&&&&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life

11. (n (sian put option 9i'es its hol!er the ri9ht to &&&&&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life

12. ( !o#n-an!-out option &&&&&&&&&&&&&&&.
(. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
B. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option
C. e"pires #orthless if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
). e"pires #orthless if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option

1$. ( !o#n-an!-in option &&&&&&&&&&&&&&&.
(. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
B. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option
C. e"pires #orthless if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
). e"pires #orthless if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option

15-$
Chapter 15 - Options Markets
1*. ( 3uanto pro'i!es its hol!er #ith &&&&&&&&&&&&&&.
(. the ri9ht to participate in the payoffs from a portfolio of 9am.lin9 casino stocks
B. the ri9ht to e"chan9e a fi"e! amount of a forei9n currency for !ollars at a specifie!
e"chan9e rate
C. the ri9ht to participate in the in'estment performance of a forei9n security
). the ri9ht to e"chan9e the payoff from a forei9n in'estment for !ollars at a fi"e! e"chan9e
rate

15. You purchase a call option on a stock. 6he profit at contract maturity of the option
position is &&&&&&&&&&& #here 2 e3uals the option4s strike price0 5
6
is the stock price at
contract e"piration an! C
0
is the ori9inal purchase price of the option.
(. Ma",-C
0
0 5
6
- 2 - C
0
-
B. Min,-C
0
0 5
6
- 2 - C
0
-
C. Ma",C
0
0 5
6
- 2 : C
0
-
). Ma",00 5
6
- 2 - C
0
-

1+. ( look.ack option pro'i!es its hol!er #ith &&&&&&&&&&&&&&&.
(. a payoff !etermine! .y either the ma"imum or minimum price of the un!erlyin9 stock
!urin9 the life of the option
B. a payoff !etermine! .y the !ifference .et#een the ma"imum an! minimum price of the
un!erlyin9 stock !urin9 the life of the option
C. a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9 the term
of the option
). a payoff .ase! on the a'era9e price of the un!erlyin9 stock o'er the life of the option

11. You #rite a put option on a stock. 6he profit at contract maturity of the option position is
&&&&&&&&&&& #here 2 e3uals the option4s strike price0 5
6
is the stock price at contract
e"piration an! ;
0
is the ori9inal premium of the put option.
(. Ma",;
0
0 2 - 5
6
- ;
0
-
B. Min,-;
0
0 2 - 5
6
- ;
0
-
C. Min,;
0
0 5
6
- 2 : ;
0
-
). Ma",00 5
6
- 2 - ;
0
-

15-*
Chapter 15 - Options Markets
17. <on9er term (merican style options #ith maturities of up to three years are calle!
&&&&&&&&&&.
(. #arrants
B. </(;5
C. =ICs
). C(6s

18. 6he initial maturities of most e"chan9e tra!e! options are 9enerally &&&&&&&&&&.
(. less than a year
B. less than 2 years
C. .et#een 1 an! 2 years
). .et#een 1 an! $ years

20. ( futures call option pro'i!es its hol!er #ith the ri9ht to &&&&&&&&&&&.
(. purchase a particular stock at some time in the future at a specifie! price
B. purchase a futures contract for the !eli'ery of options on a particular stock
C. purchase a futures contract at a specifie! price for a specifie! perio! of time
). !eli'er a futures contract an! recei'e a specifie! price at a specific !ate in the future

21. /"chan9e tra!e! stock options e"pire on the &&&&&&&&&&&&&&& of the e"piration month.
(. secon! Mon!ay
B. thir! >e!nes!ay
C. secon! 6hurs!ay
). thir! ?ri!ay

22. 6he #riter of a put option &&&&&&&&&&&&&&&.
(. a9rees to sell shares at a set price if the option hol!er !esires
B. a9rees to .uy shares at a set price if the option hol!er !esires
C. has the ri9ht to .uy shares at a set price
). has the ri9ht to sell shares at a set price

15-5
Chapter 15 - Options Markets
2$. (!'anta9es of e"chan9e tra!e! options o'er O6C options inclu!e all .ut #hich one of the
follo#in9@
(. /ase an! lo# cost of tra!in9
B. (nonymity of participants
C. Contracts that are tailore! to meet the nee!s of market participants
). Ao concerns a.out counterparty cre!it risk

2*. /ach liste! stock option contract 9i'es the hol!er the ri9ht to .uy or sell &&&&&&&&&&
shares of stock.
(. 1
B. 10
C. 100
). 10000

25. /"ercise prices for liste! stock options usually occur in increments of &&&&0 an! .racket
the current stock price.
(. 1
B. 5
C. 20
). 25

2+. You .uy a call option an! a put option on =eneral /lectric. Both the call option an! the
put option ha'e the same e"ercise price an! e"piration !ate. 6his strate9y is calle! a
&&&&&&&&&.
(. time sprea!
B. lon9 stra!!le
C. short stra!!le
). money sprea!

15-+
Chapter 15 - Options Markets
21. In 181$0 tra!in9 of stan!ar!i%e! options on a national e"chan9e starte! on the
&&&&&&&&&.
(. (M/2
B. CBO/
C. AY5/
). C?6C

27. (n (merican call option 9i'es the .uyer the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

28. ( put option on 5napple Be'era9e has an e"ercise price of $0. 6he current stock price of
5napple Be'era9e is 2*.25. 6he put option is &&&&&&&&&.
(. at the money
B. in the money
C. out of the money
). knocke! out

$0. You .uy a call option on Merritt Corp. #ith an e"ercise price of 50 an! an e"piration
!ate in July an! #rite a call option on Merritt Corp. #ith an e"ercise price of 55 #ith an
e"piration !ate in July. 6his is calle! a &&&&&&&&.
(. time sprea!
B. lon9 stra!!le
C. short stra!!le
). money sprea!

$1. ( call option on Brocklehurst Corp. has an e"ercise price of $0. 6he current stock price
of Brocklehurst Corp. is $2. 6he call option is &&&&&&&&&.
(. at the money
B. in the money
C. out of the money
). knocke! in

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Chapter 15 - Options Markets
$2. You in'est in the stock of Baylei9h Corp. an! #rite a call option on Baylei9h Corp. 6his
strate9y is calle! a &&&&&&&&&.
(. co'ere! call
B. lon9 stra!!le
C. nake! call
). money sprea!

$$. You .uy a call option on 5ummit Corp. #ith an e"ercise price of *0 an! an e"piration
!ate in 5eptem.er an! #rite a call option on 5ummit Corp. #ith an e"ercise price of *0 an!
an e"piration !ate in Octo.er. 6his strate9y is calle! a &&&&&&&&&.
(. time sprea!
B. lon9 stra!!le
C. short stra!!le
). money sprea!

$*. ( /uropean call option 9i'es the .uyer the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

$5. You in'est in the stock of Calley'ie# Corp. an! purchase a put option on Calley'ie#
Corp. 6his strate9y is calle! a &&&&&&&&&.
(. lon9 stra!!le
B. nake! put
C. protecti'e put
). short stroll

15-7
Chapter 15 - Options Markets
$+. 6he 'alue of a liste! call option on a stock is lo#er #hen &&&&&&&&&&&&&&&.
I. the e"ercise price is hi9her
II. the contract approaches maturity
III. the stock !ecreases in 'alue
IC. a stock split occurs
(. II0 III an! IC only
B. I0 III an! IC only
C. I0 II an! III only
). I0 II0 III an! IC

$1. 6he Option Clearin9 Corporation is o#ne! .y &&&&&&&&&.
(. the e"chan9es on #hich stock options are tra!e!
B. the ?e!eral )eposit Insurance Corporation
C. the ?e!eral Beser'e system
). maDor E.5. .anks

$7. 6he 'alue of a liste! put option on a stock is lo#er #hen &&&&&&&&&&&&&&&.
I. the e"ercise price is hi9her
II. the contract approaches maturity
III. the stock !ecreases in 'alue
IC. a stock split occurs
(. II only
B. II an! IC only
C. I0 II an! III only
). I0 II0 III an! IC

$8. 6he ma"imum loss a .uyer of a stock call option can suffer is the &&&&&&&&&.
(. call premium
B. stock price
C. stock price minus the 'alue of the call
). strike price minus the stock price

15-8
Chapter 15 - Options Markets
*0. >hich one of the statements a.out mar9in re3uirements on option positions is not
correct@
(. 6he mar9in re3uire! #ill .e hi9her if the option is in the money.
B. If the re3uire! mar9in e"cee!s the poste! mar9in the option #riter #ill recei'e a mar9in
call.
C. ( .uyer of a put or call option !oes not ha'e to post mar9in.
). /'en if the #riter of a call option o#ns the stock the #riter #ill ha'e to meet the mar9in
re3uirement in cash.

*1. ( /uropean put option 9i'es its hol!er the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

*2. 6he potential loss for a #riter of a nake! call option on a stock is &&&&&&&&&.
(. e3ual to the call premium
B. lar9er the lo#er the stock price
C. limite!
). unlimite!

*$. ( #riter of a call option #ill #ant the 'alue of the un!erlyin9 asset to &&&&&&&&&& an! a
.uyer of a put option #ill #ant the 'alue of the un!erlyin9 asset to &&&&&&&&&.
(. !ecrease0 !ecrease
B. !ecrease0 increase
C. increase0 !ecrease
). increase0 increase

**. Buyers of liste! options &&&&&&&&&& re3uire! to post mar9ins an! #riters of nake! liste!
options &&&&&&&&&& re3uire! to post mar9ins.
(. areF are not
B. areF are
C. are notF are
). are notF are not

15-10
Chapter 15 - Options Markets
*5. (n option #ith a payoff that !epen!s on the a'era9e price of the un!erlyin9 asset !urin9
at least some portion of the life of the option is calle! an &&&&&& option.
(. (merican
B. /uropean
C. (sian
). (ustralian

*+. ( !o#n-an!-out option is one type of &&&&&&&& option.
(. .arrier
B. look.ack
C. !i9ital
). (sian

*1. ( G.etG option is also calle! a &&&& option.
(. .arrier
B. look.ack
C. !i9ital
). forei9n e"chan9e

*7. >hich one of the follo#in9 is the ticker sym.ol for the CBO/ option contract on the
5H;100 in!e"@
(. 5;2
B. )J2
C. CM/
). O/2

*8. 6he 5eptem.er 1*0 2008 price 3uotation for a Boein9 call option #ith a strike price of 50
!ue to e"pire in Ao'em.er is $.50 #hile the stock price of Boein9 is 51. 6he premium on
one Boein9 Ao'em.er 50 call contract is &&&&&&&&&.
(. 1
B. 2.50
C. 250.00
). $50.00

15-11
Chapter 15 - Options Markets
50. You purchase one IBM March 120 put contract for a put premium of 10. 6he ma"imum
profit that you coul! 9ain from this strate9y is &&&&&&&&&.
(. 120
B. 10000
C. 110000
). 120000

51. You .uy one Ie#lett ;ackar! (u9ust 50 call contract an! one Ie#lett ;ackar! (u9ust 50
put contract. 6he call premium is 1.25 an! the put premium is *.50. Your hi9hest potential
loss from this position is &&&&&&&&&.
(. 125
B. *50
C. 515
). unlimite!

52. You sell one Ie#lett ;ackar! (u9ust 50 call contract an! sell one Ie#lett ;ackar!
(u9ust 50 put contract. 6he call premium is 1.25 an! the put premium is *.50. Your
strate9y #ill pay off &&&&&&&&&& in (u9ust.
(. only if the stock price is either lo#er than **.25 or hi9her than 55.15
B. only if the stock price is .et#een **.25 an! 55.15
C. only if the stock price is hi9her than 55.15
). only if the stock price is lo#er than **.25

5$. 5uppose you purchase one 6e"as Instruments (u9ust 15 call contract 3uote! at 7.50 an!
#rite one 6e"as Instruments (u9ust 70 call contract 3uote! at +. If0 at e"piration0 the price
of a share of 6e"as Instruments stock is 180 your profit #oul! .e &&&&&&&&&.
(. 150
B. *00
C. +00
). 10750

15-12
Chapter 15 - Options Markets
5*. &&&&&&&&&& is the most risky transaction to un!ertake in the stock in!e" option markets if
the stock market is e"pecte! to fall su.stantially after the transaction is complete!.
(. >ritin9 an unco'ere! call option
B. >ritin9 an unco'ere! put option
C. Buyin9 a call option
). Buyin9 a put option

55. >hich one of the follo#in9 is a correct statement@
(. /"ercise of #arrants results in more outstan!in9 shares of stock0 #hile e"ercise of liste!
call options !oes not.
B. ( con'erti.le .on! consists of a strai9ht .on! plus a specifie! num.er of !etacha.le
#arrants.
C. Call options al#ays ha'e an initial maturity 9reater than one year #hile #arrants ha'e an
initial maturity less than one year.
). Call options may .e con'erti.le into the stock #hile #arrants are not con'erti.le into the
stock.

5+. ( put on 5an!ers stock #ith a strike price of $5 is price! at 2 per share #hile a call #ith
a strike price of $5 is price! at $.50. 6he ma"imum per share loss to the #riter of an
unco'ere! put is &&&&&&&&&& an! the ma"imum per share 9ain to the #riter of an unco'ere!
call is &&&&&&&&&.
(. $$.00F $.50
B. $$.00F $1.50
C. $5.00F $.50
). $5.00F $5.00

15-1$
Chapter 15 - Options Markets
You are cautiously .ullish on the common stock of the >il!#oo! Corporation o'er the ne"t
se'eral months. 6he current price of the stock is 50 per share. You #ant to esta.lish a .ullish
money sprea! to help limit the cost of your option position. You fin! the follo#in9 option
3uotesJ


51. 6o esta.lish a .ull money sprea! #ith calls you #oul! &&&&&&&&&&&&&&&.
(. .uy the 55 call an! sell the *5 call
B. .uy the *5 call an! .uy the 55 call
C. .uy the *5 call an! sell the 55 call
). sell the *5 call an! sell the 55 call

57. I9norin9 commissions0 the cost to esta.lish the .ull money sprea! #ith calls #oul! .e
&&&&&&&.
(. 10050
B. +50
C. *00
). *00 income rather than cost

58. If in June the stock price is 5$ your net profit on the .ull money sprea! #oul! .e
&&&&&&&&.
(. $00
B. -*00
C. 150
). 50

15-1*
Chapter 15 - Options Markets
+0. 6o esta.lish a .ull money sprea! #ith puts you #oul! &&&&&&&&&&&&&&&.
(. sell the 55 put an! .uy the *5 put
B. .uy the *5 put an! .uy the 55 put
C. .uy the 55 put an! sell the *5 put
). sell the *5 put an! sell the 55 put

+1. 5uppose you esta.lish a .ullish money sprea! #ith the puts. In June the stock4s price turns
out to .e 52. I9norin9 commissions the net profit on your position is &&.
(. 500
B. 100
C. 200
). 250

6he common stock of the ('alon Corporation has .een tra!in9 in a narro# ran9e aroun! *0
per share for months0 an! you .elie'e it is 9oin9 to stay in that ran9e for the ne"t three
months. 6he price of a three-month put option #ith an e"ercise price of *0 is $0 an! a call
#ith the same e"piration !ate an! e"ercise price sells for *.

+2. >hat #oul! .e a simple options strate9y usin9 a put an! a call to e"ploit your con'iction
a.out the stock price4s future mo'ement@
(. 5ell a call
B. ;urchase a put
C. 5ell a stra!!le
). Buy a stra!!le

+$. 5ellin9 a stra!!le #oul! 9enerate total premium income of &&&&&.
(. $00
B. *00
C. 500
). 100

15-15
Chapter 15 - Options Markets
+*. 5uppose you #rite a strap an! the stock price #in!s up to .e *2 at contract e"piration.
>hat #as your net profit on the strap@
(. 200
B. $00
C. 100
). *00

+5. Io# can you create a position in'ol'in9 a put0 a call0 an! riskless len!in9 that #oul! ha'e
the same payoff structure as the stock at e"piration@
(. Buy the call0 sell the putF len! the present 'alue of *0
B. 5ell the call0 .uy the putF len! the present 'alue of *0
C. Buy the call0 sell the putF .orro# the present 'alue of *0
). 5ell the call0 .uy the putF .orro# the present 'alue of *0

++. ( stock is tra!in9 at 50. You .elie'e there is a +0K chance the price of the stock #ill
increase .y 10K o'er the ne"t three months. You .elie'e there is a $0K chance the stock #ill
!rop .y 5K an! you think there is only a 10K chance of a maDor !rop in price of 20K. (t the
money $ month puts are a'aila.le at a cost of +50 per contract. >hat is the e"pecte! !ollar
profit for a #riter of a nake! put at the en! of three months@
(. $00
B. 200
C. *15
). 0

+1. ( co'ere! call strate9y .enefits from #hat en'ironment@
(. ?allin9 interest rates
B. ;rice sta.ility
C. ;rice 'olatility
). Ene"pecte! e'ents

15-1+
Chapter 15 - Options Markets
+7. If you com.ine a lon9 stock position #ith .uyin9 an at the money put option the resultin9
net payoff profile #ill resem.le the payoff profile of a &&&&&&&.
(. lon9 call
B. short call
C. short put
). lon9 put

+8. >hich strate9y .enefits from upsi!e price mo'ement an! has some protection shoul! the
price of the security fall@
(. Bull sprea!
B. <on9 put
C. 5hort call
). 5tra!!le

10. >hat com.ination of puts an! calls can simulate a lon9 stock in'estment@
(. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
). 5hort call an! lon9 put

11. (n in'estor purchases a lon9 call at a price of 2.50. 6he e"piration price is $5.00. If the
current stock price is $5.100 #hat is the .reak e'en point for the in'estor@
(. $2.50
B. $5.00
C. $1.50
). $1.+0

12. (n in'estor is .earish on a particular stock an! !eci!e! to .uy a put #ith a strike price of
25. I9norin9 commissions0 if the option #as purchase! for a price of 0.750 #hat is the .reak
e'en point for the in'estor@
(. 2*.15
B. 25.00
C. 25.71
). 21.7+

15-11
Chapter 15 - Options Markets
1$. >hich of the follo#in9 strate9ies makes a profit if the stock price stays sta.le@
(. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
). 5hort call an! lon9 put

1*. >hich of the follo#in9 strate9ies makes a profit if the stock price !eclines an! loses
money #hen the stock price increases@
(. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
). 5hort call an! lon9 put

15. If you com.ine a lon9 stock position #ith sellin9 an at the money call option the resultin9
net payoff profile #ill resem.le the payoff profile of a &&&&&&&.
(. lon9 call
B. short call
C. short put
). lon9 put

1+. >hat strate9y coul! .e consi!ere! insurance for an in'estment in a portfolio of stocks@
(. Co'ere! call
B. ;rotecti'e put
C. 5hort put
). 5tra!!le

11. >hat strate9y is !esi9ne! to ensure a 'alue #ithin the .oun!s of t#o !ifferent stock
prices@
(. Collar
B. Co'ere! Call
C. ;rotecti'e put
). 5tra!!le

15-17
Chapter 15 - Options Markets
17. You are con'ince! that a stock4s price #ill mo'e .y at least 15K o'er the ne"t three
months. You are not sure #hich #ay the price #ill mo'e0 .ut you .elie'e that the results of a
patent hearin9 are !efinitely 9oin9 to ha'e a maDor effect on the stock price. You are
some#hat more .ullish than .earish ho#e'er. >hich one of the follo#in9 options strate9ies
.est fits this scenario@
(. Buy a strip
B. Buy a strap
C. Buy a stra!!le
). >rite a stra!!le

18. >hen issue! most con'erti.le .on!s are issue! &&&&&&&&&&&&&.
(. !eep in the money
B. !eep out of the money
C. sli9htly out of the money
). sli9htly in the money

70. ( con'erti.le .on! is !eep in the money. 6his means the .on! price #ill closely track the
&&&&&&&&&&.
(. strai9ht !e.t 'alue of the .on!
B. con'ersion 'alue of the .on!
C. strai9ht !e.t 'alue of the .on! minus the con'ersion 'alue
). strai9ht !e.t 'alue of the .on! plus the con'ersion 'alue

71. >arrants !iffer from liste! options in that &&&&&&&&.
I. e"ercise of #arrants results in !ilution of a firm4s earnin9s per share
II. #hen #arrants are e"ercise! ne# shares of stock must .e create!
III. #arrant e"ercise result in cash flo#s to the firm #hereas e"ercise of liste! options !oes
not
(. I only
B. I an! II only
C. II an! III only
). I0 II an! III

15-18
Chapter 15 - Options Markets
72. 5uppose you fin! t#o .on!s i!entical in all respects e"cept that Bon! ( is con'erti.le to
common stock an! Bon! B is not. Bon! ( is price! at 102*5 an! Bon! B is price! at 10120.
Bon! ( has a promise! yiel! to maturity of 5.+K an! Bon! B has a promise! yiel! to
maturity of +.1K. 6he stock of Bon! ( is tra!in9 at *8.70 per share. >hich of the follo#in9
statements isLare correct@
I. 6he 'alue of the con'ersion option for Bon! ( is 125.
II. 6he lo#er promise! yiel! to maturity of Bon! ( in!icates that the .on! is price! accor!in9
to its strai9ht !e.t 'alue rather than its con'ersion 'alue.
III. Bon! ( can .e con'erte! into 25 shares of stock.
(. II only
B. I an! III only
C. III only
). I0 II an! III

7$. You fin! !i9ital option 3uotes on Do.less claims. You can .uy a call option #ith a strike
price of $000000 Do.less claims. 6his option pays 100 if actual claims e"cee! the strike price
an! pays %ero other#ise. 6he option costs +7. ( secon! !i9ital call #ith a strike price of
$050000 Do.less claims is a'aila.le at a cost of 5$. 5uppose you .uy the option #ith the
$000000 strike an! sell the option #ith the $050000 strike an! Do.less claims actually #in! up
at $0$0000 your net profit on the position is &&&&&&.
(. -15
B. 200
C. 75
). 175

7*. Bill Jones inherite! 50000 shares of stock price! at *5 per share. Ie !oes not #ant to sell
the stock this year !ue to ta" reasons .ut he is concerne! the stock #ill !rop in 'alue .efore
year en!. Bill #ants to use a collar to ensure that he minimi%es his risk an! !oesn4t incur too
much cost in !eferrin9 the 9ain. January call options #ith a strike of 50 are 3uote! at a cost
of 2 an! January puts #ith a *0 e"ercise price are 3uote! at a cost of $. If Bill esta.lishes
the collar an! the stock price #in!s up at $5 in January0 Bill4s net position 'alue inclu!in9
the option profit or loss an! the stock is &&&&&&&&&.
(. 1850000
B. 2200000
C. 1150000
). 2150000

15-20
Chapter 15 - Options Markets
75. You o#n a stock portfolio #orth 500000. You are #orrie! that stock prices may take a
!ip .efore you are rea!y to sell so you are consi!erin9 purchasin9 either at the money or out
of the money puts. If you !eci!e to purchase the out of the money puts your ma"imum loss is
&&&&&&&&&& than if you .uy at the money puts an! your ma"imum 9ain is &&&&&&&&&&.
(. 9reaterF lo#er
B. 9reaterF 9reater
C. lo#erF 9reater
). lo#erF lo#er

7+. You purchase one IBM July 80 call contract for a premium of *. 6he stock has a 2 for 1
split prior to the e"piration !ate. You hol! the option until the e"piration !ate #hen IBM
stock sells for *7 per share. You #ill reali%e a &&&&&& on the in'estment.
(. $00 profit
B. 100 loss
C. *00 loss
). 200 profit

71. You o#n 150000 #orth of stock an! you are #orrie! the price may fall .y year en! in +
months. You are consi!erin9 either usin9 puts or calls to he!9e this position. =i'en this0
#hich of the follo#in9 statements isLare correct@
I. One #ay to he!9e your position #oul! .e to .uy puts.
II. One #ay to he!9e your position #oul! .e to #rite calls.
III. If maDor stock price !eclines are likely the he!9in9 #ith puts is pro.a.ly .etter than
he!9in9 #ith short calls.
(. I only
B. II only
C. I an! III only
). I0 II an! III

77. You sell one IBM July 80 call contract for a premium of * an! t#o puts for a premium of
$ each. You hol! the position until the e"piration !ate #hen IBM stock sells for 85 per
share. You #ill reali%e a &&&&&& on this strip.
(. $00 profit
B. 100 loss
C. 500 profit
). 200 profit

15-21
Chapter 15 - Options Markets
Chapter 15 Options Markets (ns#er Mey


Multiple Choice Questions

1. You purchase one IBM July 120 call contract for a premium of 5. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. 200 profit
B. 200 loss
C. $00 profit
). $00 loss
<on9 Call ;rofit N Ma"O00,12$ - 120-,100-P - 500 N -200

Difficulty: Medium

2. You purchase one IBM July 125 call contract for a premium of 5. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. 200 profit
B. 200 loss
C. 500 profit
D. 500 loss
<on9 Call ;rofit N Ma"O00,12$ - 125-,100-P - 500 N -500

Difficulty: Medium

15-22
Chapter 15 - Options Markets
$. You purchase one IBM July 120 put contract for a premium of $. You hol! the option
until the e"piration !ate #hen IBM stock sells for 12$ per share. You #ill reali%e a &&&&&&
on the in'estment.
(. $00 profit
B. $00 loss
C. 500 loss
). 200 profit
<on9 ;ut ;rofit N Ma"O00,120 - 12$-,100-P - $00 N -$00

Difficulty: Medium

*. You #rite one IBM July 120 call contract for a premium of *. You hol! the option until
the e"piration !ate #hen IBM stock sells for 121 per share. You #ill reali%e a &&&&&& on the
in'estment.
A. $00 profit
B. 200 loss
C. +00 loss
). 200 profit
5hort Call ;rofit N MinO00,120 - 121--,100-P : *00 N $00

Difficulty: Medium

5. (,n- &&&&&& option can only .e e"ercise! on the e"piration !ate.
(. Me"ican
B. (sian
C. (merican
D. /uropean

Difficulty: Easy

15-2$
Chapter 15 - Options Markets
+. (ll else the same0 an &&&&&& style option #ill .e &&&&&& 'alua.le than a &&&&&& style
option.
A. (merican0 more0 /uropean
B. (merican0 less0 /uropean
C. (merican0 more0 Cana!ian
). (merican0 less0 Cana!ian

Difficulty: Medium

1. (t contract maturity the 'alue of a call option is &&&&&&&&&&& #here 2 e3uals the option4s
strike price an! 5
6
is the stock price at contract e"piration.
A. Ma",00 5
6
- 2-
B. Min,00 5
6
- 2-
C. Ma",00 2 - 5
6
-
). Min,00 2 - 5
6
-

Difficulty: Medium

7. (t contract maturity the 'alue of a put option is &&&&&&&&&&& #here 2 e3uals the option4s
strike price an! 5
6
is the stock price at contract e"piration.
(. Ma",00 5
6
- 2-
B. Min,00 5
6
- 2-
C. Ma",00 2 - 5
6
-
). Min,00 2 - 5
6
-

Difficulty: Medium

8. (n (merican put option 9i'es its hol!er the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

Difficulty: Easy

15-2*
Chapter 15 - Options Markets
10. (n (sian call option 9i'es its hol!er the ri9ht to &&&&&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life

Difficulty: Easy

11. (n (sian put option 9i'es its hol!er the ri9ht to &&&&&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
D. sell the un!erlyin9 asset at a price !etermine! .y the a'era9e stock price !urin9 some
specifie! portion of the option4s life

Difficulty: Easy

12. ( !o#n-an!-out option &&&&&&&&&&&&&&&.
(. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
B. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option
C. e"pires #orthless if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
D. e"pires #orthless if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option

Difficulty: Easy

15-25
Chapter 15 - Options Markets
1$. ( !o#n-an!-in option &&&&&&&&&&&&&&&.
(. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
B. pro'i!es a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option
C. e"pires #orthless if the firm4s stock price falls .elo# some specifie! percenta9e of #hat it
#as at the .e9innin9 of the option term
). e"pires #orthless if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9
the term of the option

Difficulty: Easy

1*. ( 3uanto pro'i!es its hol!er #ith &&&&&&&&&&&&&&.
(. the ri9ht to participate in the payoffs from a portfolio of 9am.lin9 casino stocks
B. the ri9ht to e"chan9e a fi"e! amount of a forei9n currency for !ollars at a specifie!
e"chan9e rate
C. the ri9ht to participate in the in'estment performance of a forei9n security
D. the ri9ht to e"chan9e the payoff from a forei9n in'estment for !ollars at a fi"e! e"chan9e
rate

Difficulty: Medium

15. You purchase a call option on a stock. 6he profit at contract maturity of the option
position is &&&&&&&&&&& #here 2 e3uals the option4s strike price0 5
6
is the stock price at
contract e"piration an! C
0
is the ori9inal purchase price of the option.
A. Ma",-C
0
0 5
6
- 2 - C
0
-
B. Min,-C
0
0 5
6
- 2 - C
0
-
C. Ma",C
0
0 5
6
- 2 : C
0
-
). Ma",00 5
6
- 2 - C
0
-

Difficulty: Medium

15-2+
Chapter 15 - Options Markets
1+. ( look.ack option pro'i!es its hol!er #ith &&&&&&&&&&&&&&&.
A. a payoff !etermine! .y either the ma"imum or minimum price of the un!erlyin9 stock
!urin9 the life of the option
B. a payoff !etermine! .y the !ifference .et#een the ma"imum an! minimum price of the
un!erlyin9 stock !urin9 the life of the option
C. a payoff if the firm4s stock price falls .elo# some specifie! !ollar amount !urin9 the term
of the option
). a payoff .ase! on the a'era9e price of the un!erlyin9 stock o'er the life of the option

Difficulty: Easy

11. You #rite a put option on a stock. 6he profit at contract maturity of the option position is
&&&&&&&&&&& #here 2 e3uals the option4s strike price0 5
6
is the stock price at contract
e"piration an! ;
0
is the ori9inal premium of the put option.
(. Ma",;
0
0 2 - 5
6
- ;
0
-
B. Min,-;
0
0 2 - 5
6
- ;
0
-
C. Min,;
0
0 5
6
- 2 : ;
0
-
). Ma",00 5
6
- 2 - ;
0
-

Difficulty: Hard

17. <on9er term (merican style options #ith maturities of up to three years are calle!
&&&&&&&&&&.
(. #arrants
B. </(;5
C. =ICs
). C(6s

Difficulty: Easy

15-21
Chapter 15 - Options Markets
18. 6he initial maturities of most e"chan9e tra!e! options are 9enerally &&&&&&&&&&.
A. less than a year
B. less than 2 years
C. .et#een 1 an! 2 years
). .et#een 1 an! $ years

Difficulty: Easy

20. ( futures call option pro'i!es its hol!er #ith the ri9ht to &&&&&&&&&&&.
(. purchase a particular stock at some time in the future at a specifie! price
B. purchase a futures contract for the !eli'ery of options on a particular stock
C. purchase a futures contract at a specifie! price for a specifie! perio! of time
). !eli'er a futures contract an! recei'e a specifie! price at a specific !ate in the future

Difficulty: Easy

21. /"chan9e tra!e! stock options e"pire on the &&&&&&&&&&&&&&& of the e"piration month.
(. secon! Mon!ay
B. thir! >e!nes!ay
C. secon! 6hurs!ay
D. thir! ?ri!ay

Difficulty: Medium

22. 6he #riter of a put option &&&&&&&&&&&&&&&.
(. a9rees to sell shares at a set price if the option hol!er !esires
B. a9rees to .uy shares at a set price if the option hol!er !esires
C. has the ri9ht to .uy shares at a set price
). has the ri9ht to sell shares at a set price

Difficulty: Easy

15-27
Chapter 15 - Options Markets
2$. (!'anta9es of e"chan9e tra!e! options o'er O6C options inclu!e all .ut #hich one of the
follo#in9@
(. /ase an! lo# cost of tra!in9
B. (nonymity of participants
C. Contracts that are tailore! to meet the nee!s of market participants
). Ao concerns a.out counterparty cre!it risk

Difficulty: Easy

2*. /ach liste! stock option contract 9i'es the hol!er the ri9ht to .uy or sell &&&&&&&&&&
shares of stock.
(. 1
B. 10
C. 100
). 10000

Difficulty: Easy

25. /"ercise prices for liste! stock options usually occur in increments of &&&&0 an! .racket
the current stock price.
(. 1
B. 5
C. 20
). 25

Difficulty: Easy

2+. You .uy a call option an! a put option on =eneral /lectric. Both the call option an! the
put option ha'e the same e"ercise price an! e"piration !ate. 6his strate9y is calle! a
&&&&&&&&&.
(. time sprea!
B. lon9 stra!!le
C. short stra!!le
). money sprea!

Difficulty: Easy

15-28
Chapter 15 - Options Markets
21. In 181$0 tra!in9 of stan!ar!i%e! options on a national e"chan9e starte! on the
&&&&&&&&&.
(. (M/2
B. CBO/
C. AY5/
). C?6C

Difficulty: Easy

27. (n (merican call option 9i'es the .uyer the ri9ht to &&&&&&&&&.
A. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

Difficulty: Easy

28. ( put option on 5napple Be'era9e has an e"ercise price of $0. 6he current stock price of
5napple Be'era9e is 2*.25. 6he put option is &&&&&&&&&.
(. at the money
B. in the money
C. out of the money
). knocke! out

Difficulty: Easy

$0. You .uy a call option on Merritt Corp. #ith an e"ercise price of 50 an! an e"piration
!ate in July an! #rite a call option on Merritt Corp. #ith an e"ercise price of 55 #ith an
e"piration !ate in July. 6his is calle! a &&&&&&&&.
(. time sprea!
B. lon9 stra!!le
C. short stra!!le
D. money sprea!

Difficulty: Easy

15-$0
Chapter 15 - Options Markets
$1. ( call option on Brocklehurst Corp. has an e"ercise price of $0. 6he current stock price
of Brocklehurst Corp. is $2. 6he call option is &&&&&&&&&.
(. at the money
B. in the money
C. out of the money
). knocke! in

Difficulty: Easy

$2. You in'est in the stock of Baylei9h Corp. an! #rite a call option on Baylei9h Corp. 6his
strate9y is calle! a &&&&&&&&&.
A. co'ere! call
B. lon9 stra!!le
C. nake! call
). money sprea!

Difficulty: Easy

$$. You .uy a call option on 5ummit Corp. #ith an e"ercise price of *0 an! an e"piration
!ate in 5eptem.er an! #rite a call option on 5ummit Corp. #ith an e"ercise price of *0 an!
an e"piration !ate in Octo.er. 6his strate9y is calle! a &&&&&&&&&.
A. time sprea!
B. lon9 stra!!le
C. short stra!!le
). money sprea!

Difficulty: Easy

$*. ( /uropean call option 9i'es the .uyer the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
). sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

Difficulty: Easy

15-$1
Chapter 15 - Options Markets
$5. You in'est in the stock of Calley'ie# Corp. an! purchase a put option on Calley'ie#
Corp. 6his strate9y is calle! a &&&&&&&&&.
(. lon9 stra!!le
B. nake! put
C. protecti'e put
). short stroll

Difficulty: Medium

$+. 6he 'alue of a liste! call option on a stock is lo#er #hen &&&&&&&&&&&&&&&.
I. the e"ercise price is hi9her
II. the contract approaches maturity
III. the stock !ecreases in 'alue
IC. a stock split occurs
(. II0 III an! IC only
B. I0 III an! IC only
C. I0 II an! III only
). I0 II0 III an! IC

Difficulty: Medium

$1. 6he Option Clearin9 Corporation is o#ne! .y &&&&&&&&&.
A. the e"chan9es on #hich stock options are tra!e!
B. the ?e!eral )eposit Insurance Corporation
C. the ?e!eral Beser'e system
). maDor E.5. .anks

Difficulty: Easy

15-$2
Chapter 15 - Options Markets
$7. 6he 'alue of a liste! put option on a stock is lo#er #hen &&&&&&&&&&&&&&&.
I. the e"ercise price is hi9her
II. the contract approaches maturity
III. the stock !ecreases in 'alue
IC. a stock split occurs
A. II only
B. II an! IC only
C. I0 II an! III only
). I0 II0 III an! IC

Difficulty: Medium

$8. 6he ma"imum loss a .uyer of a stock call option can suffer is the &&&&&&&&&.
A. call premium
B. stock price
C. stock price minus the 'alue of the call
). strike price minus the stock price

Difficulty: Easy

*0. >hich one of the statements a.out mar9in re3uirements on option positions is not
correct@
(. 6he mar9in re3uire! #ill .e hi9her if the option is in the money.
B. If the re3uire! mar9in e"cee!s the poste! mar9in the option #riter #ill recei'e a mar9in
call.
C. ( .uyer of a put or call option !oes not ha'e to post mar9in.
D. /'en if the #riter of a call option o#ns the stock the #riter #ill ha'e to meet the mar9in
re3uirement in cash.

Difficulty: Medium

15-$$
Chapter 15 - Options Markets
*1. ( /uropean put option 9i'es its hol!er the ri9ht to &&&&&&&&&.
(. .uy the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
B. .uy the un!erlyin9 asset at the e"ercise price only at the e"piration !ate
C. sell the un!erlyin9 asset at the e"ercise price on or .efore the e"piration !ate
D. sell the un!erlyin9 asset at the e"ercise price only at the e"piration !ate

Difficulty: Easy

*2. 6he potential loss for a #riter of a nake! call option on a stock is &&&&&&&&&.
(. e3ual to the call premium
B. lar9er the lo#er the stock price
C. limite!
D. unlimite!

Difficulty: Medium

*$. ( #riter of a call option #ill #ant the 'alue of the un!erlyin9 asset to &&&&&&&&&& an! a
.uyer of a put option #ill #ant the 'alue of the un!erlyin9 asset to &&&&&&&&&.
A. !ecrease0 !ecrease
B. !ecrease0 increase
C. increase0 !ecrease
). increase0 increase

Difficulty: Medium

**. Buyers of liste! options &&&&&&&&&& re3uire! to post mar9ins an! #riters of nake! liste!
options &&&&&&&&&& re3uire! to post mar9ins.
(. areF are not
B. areF are
C. are notF are
). are notF are not

Difficulty: Medium

15-$*
Chapter 15 - Options Markets
*5. (n option #ith a payoff that !epen!s on the a'era9e price of the un!erlyin9 asset !urin9
at least some portion of the life of the option is calle! an &&&&&& option.
(. (merican
B. /uropean
C. (sian
). (ustralian

Difficulty: Easy

*+. ( !o#n-an!-out option is one type of &&&&&&&& option.
A. .arrier
B. look.ack
C. !i9ital
). (sian

Difficulty: Medium

*1. ( G.etG option is also calle! a &&&& option.
(. .arrier
B. look.ack
C. !i9ital
). forei9n e"chan9e

Difficulty: Medium

*7. >hich one of the follo#in9 is the ticker sym.ol for the CBO/ option contract on the
5H;100 in!e"@
(. 5;2
B. )J2
C. CM/
D. O/2

Difficulty: Medium

15-$5
Chapter 15 - Options Markets
*8. 6he 5eptem.er 1*0 2008 price 3uotation for a Boein9 call option #ith a strike price of 50
!ue to e"pire in Ao'em.er is $.50 #hile the stock price of Boein9 is 51. 6he premium on
one Boein9 Ao'em.er 50 call contract is &&&&&&&&&.
(. 1
B. 2.50
C. 250.00
D. $50.00

Difficulty: Easy

50. You purchase one IBM March 120 put contract for a put premium of 10. 6he ma"imum
profit that you coul! 9ain from this strate9y is &&&&&&&&&.
(. 120
B. 10000
C. 110000
). 120000
Profit N 100,120 - 10- N 110000.00

Difficulty: Medium

51. You .uy one Ie#lett ;ackar! (u9ust 50 call contract an! one Ie#lett ;ackar! (u9ust 50
put contract. 6he call premium is 1.25 an! the put premium is *.50. Your hi9hest potential
loss from this position is &&&&&&&&&.
(. 125
B. *50
C. 515
). unlimite!
Loss N 100,1.25 : *.50- N 515.00 if stock price is 50 at e"piration.

Difficulty: Medium

15-$+
Chapter 15 - Options Markets
52. You sell one Ie#lett ;ackar! (u9ust 50 call contract an! sell one Ie#lett ;ackar!
(u9ust 50 put contract. 6he call premium is 1.25 an! the put premium is *.50. Your
strate9y #ill pay off &&&&&&&&&& in (u9ust.
(. only if the stock price is either lo#er than **.25 or hi9her than 55.15
B. only if the stock price is .et#een **.25 an! 55.15
C. only if the stock price is hi9her than 55.15
). only if the stock price is lo#er than **.25
You ha'e positi'e profit in the ran9e 50 - ,1.25 : *.50- an! 50 : ,1.25 : *.50-

Difficulty: Medium

5$. 5uppose you purchase one 6e"as Instruments (u9ust 15 call contract 3uote! at 7.50 an!
#rite one 6e"as Instruments (u9ust 70 call contract 3uote! at +. If0 at e"piration0 the price
of a share of 6e"as Instruments stock is 180 your profit #oul! .e &&&&&&&&&.
A. 150
B. *00
C. +00
). 10750
Profit N 100 O,18 - 15-P - 7.50 : +.00P N 150

Difficulty: Hard

5*. &&&&&&&&&& is the most risky transaction to un!ertake in the stock in!e" option markets if
the stock market is e"pecte! to fall su.stantially after the transaction is complete!.
(. >ritin9 an unco'ere! call option
B. >ritin9 an unco'ere! put option
C. Buyin9 a call option
). Buyin9 a put option

Difficulty: Easy

15-$1
Chapter 15 - Options Markets
55. >hich one of the follo#in9 is a correct statement@
A. /"ercise of #arrants results in more outstan!in9 shares of stock0 #hile e"ercise of liste!
call options !oes not.
B. ( con'erti.le .on! consists of a strai9ht .on! plus a specifie! num.er of !etacha.le
#arrants.
C. Call options al#ays ha'e an initial maturity 9reater than one year #hile #arrants ha'e an
initial maturity less than one year.
). Call options may .e con'erti.le into the stock #hile #arrants are not con'erti.le into the
stock.

Difficulty: Medium

5+. ( put on 5an!ers stock #ith a strike price of $5 is price! at 2 per share #hile a call #ith
a strike price of $5 is price! at $.50. 6he ma"imum per share loss to the #riter of an
unco'ere! put is &&&&&&&&&& an! the ma"imum per share 9ain to the #riter of an unco'ere!
call is &&&&&&&&&.
A. $$.00F $.50
B. $$.00F $1.50
C. $5.00F $.50
). $5.00F $5.00
Ma"imum per share loss to put #riter N ,$5 - 0- : 2 N $$.00 if stock price is 0 at e"piration.
Ma"imum per share 9ain to call #riter N $.50 if stock price is .elo# *0 at e"piration.

Difficulty: Medium

You are cautiously .ullish on the common stock of the >il!#oo! Corporation o'er the ne"t
se'eral months. 6he current price of the stock is 50 per share. You #ant to esta.lish a .ullish
money sprea! to help limit the cost of your option position. You fin! the follo#in9 option
3uotesJ


15-$7
Chapter 15 - Options Markets
51. 6o esta.lish a .ull money sprea! #ith calls you #oul! &&&&&&&&&&&&&&&.
(. .uy the 55 call an! sell the *5 call
B. .uy the *5 call an! .uy the 55 call
C. .uy the *5 call an! sell the 55 call
). sell the *5 call an! sell the 55 call

Difficulty: Medium

57. I9norin9 commissions0 the cost to esta.lish the .ull money sprea! #ith calls #oul! .e
&&&&&&&.
(. 10050
B. +50
C. *00
). *00 income rather than cost
6o esta.lish a .ull money sprea! #ith calls you #oul! .uy the *5 call at a cost of 7.50 an!
#rite the 55 call0 earnin9 the 2.00 premium. 6he initial cost is ,2.00 - 7.50-,100- N -+50.

Difficulty: Hard

58. If in June the stock price is 5$ your net profit on the .ull money sprea! #oul! .e
&&&&&&&&.
(. $00
B. -*00
C. 150
). 50
5
6
N 5$ at contract maturity in June. ;rofit N C
*50June
- C
550June
- Initial Cost
;rofit N OMa",005$ - *5--Ma",00 5$ - 55-P,100- - +50 N 150

Difficulty: Hard

15-$8
Chapter 15 - Options Markets
+0. 6o esta.lish a .ull money sprea! #ith puts you #oul! &&&&&&&&&&&&&&&.
A. sell the 55 put an! .uy the *5 put
B. .uy the *5 put an! .uy the 55 put
C. .uy the 55 put an! sell the *5 put
). sell the *5 put an! sell the 55 put

Difficulty: Medium

+1. 5uppose you esta.lish a .ullish money sprea! #ith the puts. In June the stock4s price turns
out to .e 52. I9norin9 commissions the net profit on your position is &&.
(. 500
B. 100
C. 200
D. 250
6o esta.lish a .ull money sprea! #ith puts you #oul! .uy the *5 put at a cost of 2.00 an!
#rite the 55 put0 earnin9 the 1.50 premium. 6he initial re'enue is ,1.50 - 2.00-,100- N
550.
5
6
N 52 at contract maturity in June. ;rofit N ;
*50June
- ;
550June
: Initial Be'enue
;rofit N OMa",00*5 - 52- - Ma",00 55 - 52-P,100- : 550 N 250

Difficulty: Hard

6he common stock of the ('alon Corporation has .een tra!in9 in a narro# ran9e aroun! *0
per share for months0 an! you .elie'e it is 9oin9 to stay in that ran9e for the ne"t three
months. 6he price of a three-month put option #ith an e"ercise price of *0 is $0 an! a call
#ith the same e"piration !ate an! e"ercise price sells for *.

+2. >hat #oul! .e a simple options strate9y usin9 a put an! a call to e"ploit your con'iction
a.out the stock price4s future mo'ement@
(. 5ell a call
B. ;urchase a put
C. 5ell a stra!!le
). Buy a stra!!le

Difficulty: Medium

15-*0
Chapter 15 - Options Markets
+$. 5ellin9 a stra!!le #oul! 9enerate total premium income of &&&&&.
(. $00
B. *00
C. 500
D. 100
5ell a stra!!le N sell a put : sell a call
;remium income for sellin9 a stra!!le N ,;
0
: C
0
-100 N ,$ : *-,100- N 100

Difficulty: Medium

+*. 5uppose you #rite a strap an! the stock price #in!s up to .e *2 at contract e"piration.
>hat #as your net profit on the strap@
(. 200
B. $00
C. 100
). *00
5ellin9 a strap entails sellin9 t#o calls an! sellin9 one put. Initial income N 2C
0
: ;
0
N ,,2-,*-
: $-,100- N 1100. If the final stock price is *2 the position profit is foun! as ;rofit N O-
2Ma",00*2 - *0- : Ma",00*0 - *2-P,100- : 1100 N 100

Difficulty: Hard

+5. Io# can you create a position in'ol'in9 a put0 a call0 an! riskless len!in9 that #oul! ha'e
the same payoff structure as the stock at e"piration@
A. Buy the call0 sell the putF len! the present 'alue of *0
B. 5ell the call0 .uy the putF len! the present 'alue of *0
C. Buy the call0 sell the putF .orro# the present 'alue of *0
). 5ell the call0 .uy the putF .orro# the present 'alue of *0

Difficulty: Hard

15-*1
Chapter 15 - Options Markets
++. ( stock is tra!in9 at 50. You .elie'e there is a +0K chance the price of the stock #ill
increase .y 10K o'er the ne"t three months. You .elie'e there is a $0K chance the stock #ill
!rop .y 5K an! you think there is only a 10K chance of a maDor !rop in price of 20K. (t the
money $ month puts are a'aila.le at a cost of +50 per contract. >hat is the e"pecte! !ollar
profit for a #riter of a nake! put at the en! of three months@
(. $00
B. 200
C. *15
). 0
/O;rofitP N -O0.+0Ma",0050 - ,50-,1.1-- : 0.$0Ma",0050 - ,50-,0.85-- :
0.10Ma",0050 - ,50-,0.70--P,100- : +50 N - O0.+ ,0- : 0.$,250- : 0.1,1000-P : +50 N
*15

Difficulty: Hard

+1. ( co'ere! call strate9y .enefits from #hat en'ironment@
(. ?allin9 interest rates
B. ;rice sta.ility
C. ;rice 'olatility
). Ene"pecte! e'ents

Difficulty: Medium

+7. If you com.ine a lon9 stock position #ith .uyin9 an at the money put option the resultin9
net payoff profile #ill resem.le the payoff profile of a &&&&&&&.
A. lon9 call
B. short call
C. short put
). lon9 put

Difficulty: Medium

15-*2
Chapter 15 - Options Markets
+8. >hich strate9y .enefits from upsi!e price mo'ement an! has some protection shoul! the
price of the security fall@
A. Bull sprea!
B. <on9 put
C. 5hort call
). 5tra!!le

Difficulty: Medium

10. >hat com.ination of puts an! calls can simulate a lon9 stock in'estment@
A. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
). 5hort call an! lon9 put

Difficulty: Medium

11. (n in'estor purchases a lon9 call at a price of 2.50. 6he e"piration price is $5.00. If the
current stock price is $5.100 #hat is the .reak e'en point for the in'estor@
(. $2.50
B. $5.00
C. $1.50
). $1.+0
Break e'en N $5.00 : 2.50 N $1.50

Difficulty: Easy

15-*$
Chapter 15 - Options Markets
12. (n in'estor is .earish on a particular stock an! !eci!e! to .uy a put #ith a strike price of
25. I9norin9 commissions0 if the option #as purchase! for a price of 0.750 #hat is the .reak
e'en point for the in'estor@
A. 2*.15
B. 25.00
C. 25.71
). 21.7+
Break e'en N 25 - .75 N 2*.15

Difficulty: Easy

1$. >hich of the follo#in9 strate9ies makes a profit if the stock price stays sta.le@
(. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
). 5hort call an! lon9 put

Difficulty: Medium

1*. >hich of the follo#in9 strate9ies makes a profit if the stock price !eclines an! loses
money #hen the stock price increases@
(. <on9 call an! short put
B. <on9 call an! lon9 put
C. 5hort call an! short put
D. 5hort call an! lon9 put

Difficulty: Medium

15-**
Chapter 15 - Options Markets
15. If you com.ine a lon9 stock position #ith sellin9 an at the money call option the resultin9
net payoff profile #ill resem.le the payoff profile of a &&&&&&&.
(. lon9 call
B. short call
C. short put
). lon9 put

Difficulty: Hard

1+. >hat strate9y coul! .e consi!ere! insurance for an in'estment in a portfolio of stocks@
(. Co'ere! call
B. ;rotecti'e put
C. 5hort put
). 5tra!!le

Difficulty: Medium

11. >hat strate9y is !esi9ne! to ensure a 'alue #ithin the .oun!s of t#o !ifferent stock
prices@
A. Collar
B. Co'ere! Call
C. ;rotecti'e put
). 5tra!!le

Difficulty: Medium

15-*5
Chapter 15 - Options Markets
17. You are con'ince! that a stock4s price #ill mo'e .y at least 15K o'er the ne"t three
months. You are not sure #hich #ay the price #ill mo'e0 .ut you .elie'e that the results of a
patent hearin9 are !efinitely 9oin9 to ha'e a maDor effect on the stock price. You are
some#hat more .ullish than .earish ho#e'er. >hich one of the follo#in9 options strate9ies
.est fits this scenario@
(. Buy a strip
B. Buy a strap
C. Buy a stra!!le
). >rite a stra!!le

Difficulty: Hard

18. >hen issue! most con'erti.le .on!s are issue! &&&&&&&&&&&&&.
(. !eep in the money
B. !eep out of the money
C. sli9htly out of the money
). sli9htly in the money

Difficulty: Medium

70. ( con'erti.le .on! is !eep in the money. 6his means the .on! price #ill closely track the
&&&&&&&&&&.
(. strai9ht !e.t 'alue of the .on!
B. con'ersion 'alue of the .on!
C. strai9ht !e.t 'alue of the .on! minus the con'ersion 'alue
). strai9ht !e.t 'alue of the .on! plus the con'ersion 'alue

Difficulty: Medium

15-*+
Chapter 15 - Options Markets
71. >arrants !iffer from liste! options in that &&&&&&&&.
I. e"ercise of #arrants results in !ilution of a firm4s earnin9s per share
II. #hen #arrants are e"ercise! ne# shares of stock must .e create!
III. #arrant e"ercise result in cash flo#s to the firm #hereas e"ercise of liste! options !oes
not
(. I only
B. I an! II only
C. II an! III only
D. I0 II an! III

Difficulty: Medium

72. 5uppose you fin! t#o .on!s i!entical in all respects e"cept that Bon! ( is con'erti.le to
common stock an! Bon! B is not. Bon! ( is price! at 102*5 an! Bon! B is price! at 10120.
Bon! ( has a promise! yiel! to maturity of 5.+K an! Bon! B has a promise! yiel! to
maturity of +.1K. 6he stock of Bon! ( is tra!in9 at *8.70 per share. >hich of the follo#in9
statements isLare correct@
I. 6he 'alue of the con'ersion option for Bon! ( is 125.
II. 6he lo#er promise! yiel! to maturity of Bon! ( in!icates that the .on! is price! accor!in9
to its strai9ht !e.t 'alue rather than its con'ersion 'alue.
III. Bon! ( can .e con'erte! into 25 shares of stock.
(. II only
B. I an! III only
C. III only
). I0 II an! III
I. 'alue of con'ersion option N 102*5 - 10120 N 125
II. the lo#er yiel! on the .on! that !iffers only in it con'ersion feature in!icates the .on! is
price! accor!in9 to its con'ersion 'alue0 not its strai9ht !e.t 'alue
III. 102*5L*8.70 N 25.00

Difficulty: Hard

15-*1
Chapter 15 - Options Markets
7$. You fin! !i9ital option 3uotes on Do.less claims. You can .uy a call option #ith a strike
price of $000000 Do.less claims. 6his option pays 100 if actual claims e"cee! the strike price
an! pays %ero other#ise. 6he option costs +7. ( secon! !i9ital call #ith a strike price of
$050000 Do.less claims is a'aila.le at a cost of 5$. 5uppose you .uy the option #ith the
$000000 strike an! sell the option #ith the $050000 strike an! Do.less claims actually #in! up
at $0$0000 your net profit on the position is &&&&&&.
(. -15
B. 200
C. 75
). 175
Initial cost N -C
$00
: C
$05
N -+7 : 5$ N -15
(t actual Do.less claims of $0$0000 at contract maturity the C
$00
call is #orth 100 an! the
C
$05
call is #orthless. ;rofit N : 100 - 0 -15 N 75

Difficulty: Medium

7*. Bill Jones inherite! 50000 shares of stock price! at *5 per share. Ie !oes not #ant to sell
the stock this year !ue to ta" reasons .ut he is concerne! the stock #ill !rop in 'alue .efore
year en!. Bill #ants to use a collar to ensure that he minimi%es his risk an! !oesn4t incur too
much cost in !eferrin9 the 9ain. January call options #ith a strike of 50 are 3uote! at a cost
of 2 an! January puts #ith a *0 e"ercise price are 3uote! at a cost of $. If Bill esta.lishes
the collar an! the stock price #in!s up at $5 in January0 Bill4s net position 'alue inclu!in9
the option profit or loss an! the stock is &&&&&&&&&.
A. 1850000
B. 2200000
C. 1150000
). 2150000
;osition 'alue N 5000 shares " *5Lshare N 2250000. 6o esta.lish a collar you #oul! nee!
5000L100 N 50 options. You #oul! .uy the 50 puts at a cost of $,100-,50- N 150000 an!
#rite the 50 calls0 earnin9 a premium of 2,100-,50- N 100000. 6he initial cost is 150000 -
100000 N 50000. If the stock price in January is $5 then profit can .e foun! asJ
;rofit N OMa",00*0 - $5- - Ma",00$5 - 50-P,100-,50- - 50000 N 200000
Ae# 5tock 'alue N 5000 shares " $5 N 1150000 so net position 'alue N 1150000 : 200000
N 1850000

Difficulty: Hard

15-*7
Chapter 15 - Options Markets
75. You o#n a stock portfolio #orth 500000. You are #orrie! that stock prices may take a
!ip .efore you are rea!y to sell so you are consi!erin9 purchasin9 either at the money or out
of the money puts. If you !eci!e to purchase the out of the money puts your ma"imum loss is
&&&&&&&&&& than if you .uy at the money puts an! your ma"imum 9ain is &&&&&&&&&&.
(. 9reaterF lo#er
B. 9reaterF 9reater
C. lo#erF 9reater
). lo#erF lo#er

Difficulty: Hard

7+. You purchase one IBM July 80 call contract for a premium of *. 6he stock has a 2 for 1
split prior to the e"piration !ate. You hol! the option until the e"piration !ate #hen IBM
stock sells for *7 per share. You #ill reali%e a &&&&&& on the in'estment.
(. $00 profit
B. 100 loss
C. *00 loss
D. 200 profit
<on9 Call ;rofit N 2Ma"O00,*7 - ,80L2-,100-P - *00 N 200

Difficulty: Hard

71. You o#n 150000 #orth of stock an! you are #orrie! the price may fall .y year en! in +
months. You are consi!erin9 either usin9 puts or calls to he!9e this position. =i'en this0
#hich of the follo#in9 statements isLare correct@
I. One #ay to he!9e your position #oul! .e to .uy puts.
II. One #ay to he!9e your position #oul! .e to #rite calls.
III. If maDor stock price !eclines are likely the he!9in9 #ith puts is pro.a.ly .etter than
he!9in9 #ith short calls.
(. I only
B. II only
C. I an! III only
D. I0 II an! III

Difficulty: Medium

15-*8
Chapter 15 - Options Markets
77. You sell one IBM July 80 call contract for a premium of * an! t#o puts for a premium of
$ each. You hol! the position until the e"piration !ate #hen IBM stock sells for 85 per
share. You #ill reali%e a &&&&&& on this strip.
(. $00 profit
B. 100 loss
C. 500 profit
). 200 profit
5ellin9 an IBM July 80 strip entails sellin9 t#o IBM July 80 puts an! one IBM July 80 call.
Initial income N C80 : 2;80 N ,* : 2,$--,100- N 1000. If the final stock price is 85 the
position 'alue is foun! as
;rofit N O-Ma",0085 - 80- : 2Ma",0080 - 85-P,100- : 1000 N -500 : 1000 N 500

Difficulty: Hard

15-50