Homework on Chapter 20

1.

An option is a type of contract between a buyer and a writer wherein one grants
the other the __ to buy or sell a specific asset at a specific price within a specified
date.
a.
right
b.
obligation
c.
tax status
d.
power of attorney

2.

A ___ option gives the buyer the right to purchase a specific number of shares of
a specific company from the writer at a specific purchase price by a specific date.
a.
put
b.
call
c.
stock index
d.
swap

3.

The price of an option contract paid to the writer is known as the

a.
commission
b.
percentage spread
c.
premium
e.
exercise price

4.

The intrinsic value of an option is the value if it were exercised

a.
immediately
b.
only at the expiration date
c.
out-of-the money
d.
in-the-money

5.

The term ____ indicates that the option writer does not own the underlying stock
on which the option is written.
a.
off-cover
b.
naked
c.
covered call writing
d.
European option

6.

An American option can be exercised

a.
only on its expiration date.
b.
at any central security exchange.
c.
anytime during its life.
d.
only when the stock pays dividends.

7.

For a put option, the kink in the intrinsic value curve occurs at the
a.
premium price.
b.
exercise price.
c.
value of $0.
d.
value of strike price - market price.

8.

The market that is a zero-sum game is the

a.
common stock.
b.
preferred stock.
c.
options.
d.
Treasury bill.

9.

For an option, the exercise price is also called the

a.
striking price.
b.
booking price.
c.
market value.
d.
spot price.

10.

The purchaser of a call option feels that the stock will

a.
pay a large dividend.
b.
maintain a level price.
c.
have a drop in price.
d.
have a price rise.

11.

A put option does not specify the

a.
number of shares that can be sold.
b.
exercise price.
c.
premium on the put option.
d.
company whose shares can be sold.

12.

The purchaser of a put option expects the stock price to

a.
fall.
b.
double.
c.
remain level.

13.

As compensation for the risk of an option writer, the option purchaser will pay
a.
b.
c.
d.

a commission.
a cash dividend.
an intrinsic value.
a premium.

14.

The higher the amount of dividends a stock pays, the

a.
the lower its dividend yield.
b.
the higher the value of a call option.
c.
the value of a call will increase immediately after the ex-dividend day.
d.
the lower the value of a call option.

15.

A put option is out of the money if the

a.
expiration date is more than six months.
b.
market price is greater than the exercise price.
c.
the stock declares a dividend.
d.
market and exercise prices are equal.

16.

A put option gives the owner the

a.
obligation to sell shares.
b.
right to buy shares.
c.
right to sell shares.
d.
right to buy or sell shares.

17.

Buying and selling a call option on the same stock with the same strike price and
expiration date is a
a.
strip.
b.
straddle.
c.
spread.
d.
split.

18.

If an investor buys a call with a strike price of $90 and the underlying stock at the
time of expiration is $96, what is her profit or loss per share if she paid the writer
$4 a share?
a.
$2
b.
$1
c.
-$1
d.
-$2

19.

If a writer sells a put with a strike price of $70 at $3 per share, what is his profit or
loss if the underlying stock at expiration is selling at $72?
a.
$4
b.
$3
c.
-$3
d.
-$4

20.

If a writer sells a naked call option with an exercise price of $100 at $9 per share,
what is her profit or loss at expiration is the stock is selling at $115?
a.
$5
b.
-$5
c.
-$6
d.
-$10

21.

The Option Clearing Corporation created the ______ system to protect itself from
the actions of the writers.
a.
margin
b.
commission
c.
order book
d.
option pricing

22.

A(n) ____ will increase the market value of a put option.

a.
interest rate change
b.
increase in the dividend rate of the underlying stock
c.
decrease in the volatility of the underlying stock
d.
decrease in the earnings rate of the underlying stock

23.

A(n) ____ will increase the market value of a call option.

a.
decrease in the announced dividend amount
b.
decrease in the time to expiration
c.
decrease in the volatility of the underlying stock
d.
increase in the interest rate

24.

You own a call option with a strike price of $40 and a stock market price of $46.
The intrinsic value of the call is
a.
b.
c.
d.
(e)

25.

$6
$40.
$46.
-$6.
.$ 0.

At the CBOE, options trading is

a.
through open outcry.
b.
from a closed order book.
c.
done only at the hour mark.
d.
all done through computer matching.

26.

The percentage of the premium that the buyer of a call option is allowed to
borrow through margin is
a.
b.
c.
d.

50.
0.
33.
80.

27.

A writer sells a covered call at $3 per share with a strike price of $65. If the stock
price rises to $71 at expiration, what is the profit or loss to the writer?
a.
$6
b.
$2
c.
-$2
d.
-$6

28.

An important assumption of put-call parity is that

a.
both options may have different exercise prices but the same expiration
dates
b.
both options have the same exercise prices and the same expiration dates
c.
both options will produce the same payoff on the stock as well as a risky
bond
d.
both options will produce the same payoff on the stock as well as another
risky asset.