Department of Banking and Finance Graduate Program

THIS IS JUST A SAMPLE AND IS NOT

COMPREHENSIVE!! GOOD LUCK
Q1.

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)
a and c.
E)
b and c.
Q2.
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.
Q3.
You write one AT&T February $50 (X) put for a premium of $5. Ignoring transactions costs, what is
the breakeven price of this position?
A)
$50
B)
$55
C)
$45
D)
$40
E)
none of the above
Q4.
You purchase one IBM $70 (X) call option for a premium of $6. Ignoring transaction costs, the
break-even price of the position is
A)
$98
B)
$64
C)
$76
D)
$70
E)
none of the above
Q5.
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
Q6.
Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a
premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a
profit if the price of the share
A)
increases to $104.
B)
decreases to $90.
C)
increases to $107.
D)
decreases to $96.
E)
none of the above.
Q7.
You purchase one IBM March $100 (X) put contract for a put premium of $6. What is the maximum
profit that you could gain from this strategy?
A)
$10,000
B)
$10,600
C)
$9,400
D)
$9,000
E)
none of the above
Q8.
You purchased a call option for $3.45 seventeen 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?

Department of Banking and Finance Graduate Program

A)
173.9%, -100%
B)
73.9%, -100%
C)
57.5%, -173.9%
D)
73.9%, -57.5%
E)
100%, -100%
Q9.
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.
Q10. 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.
Q11. A covered call position is equivalent to a
A)
long put.
B)
short put.
C)
long straddle.
D)
vertical spread.
E)
none of the above.
Q12. 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 above.
Use the following to answer questions Q13-Q15:
You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put
premium is $3.
Q13. Your strategy is called
A)
a short straddle.
B)
a long straddle.
C)
a horizontal straddle.
D)
a covered call.
E)
none of the above.
Q14. Your maximum loss from this position could be
A)
$500.
B)
$300.
C)
$800.
D)
$200.
E)
none of the above.
Q15. At expiration, you break even if the stock price is equal to
A) $52.
B) $60.
C) $68.
D) both A and C.
E) none of the above.

Department of Banking and Finance Graduate Program

Q16. 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

Section B: (10 points)

Suppose you think Wal-Mart stock is going to appreciate substantially in value in the next six
months. The stocks current price is $100 and the European call option expiring in six months has
an exercise price of $100. The options premium is $10 per share. With $10,000 to invest, you are
considering the following investment alternatives:
Alternative 1: Invest all $10,000 in the stock, buying 100 shares.
Alternative 2: Invest all $10,000 in the call option
Alternative 3: Invest $1,000 in the call option and invest the remaining $9,000 in a money market
fund paying 4% in interest over six months.
(a) What is your rate of return (%) for each alternative for three stock prices six months from now?
Put your results in the following table. (8 points)
Note: Rate of Return=Profit/Money you invested

Alternative 1 (all stocks)

Alternative 2 (all options)
Alternative 3 (options + money market)

Price of Stock Six Months from Now

$70
$110
$130
%
%
%
%
%
%
%
%
%

(b) At $70 stock price six months from now, which alternative is best and why? (2 points)

Department of Banking and Finance Graduate Program

1. The terms of futures contracts __________ standardized, and the terms of forward contracts
__________ standardized.
A. are; are
B. are not; are
C. are; are not
D. are not; are not
E. are; may or may not be

2. In a futures contract the futures price is

A. determined by the buyer and the seller when the delivery of the commodity takes place.
B. determined by the futures exchange.
C. determined by the buyer and the seller when they initiate the contract.
D. determined independently by the provider of the underlying asset.
E. none of the above.

3. The buyer of a futures contract is said to have a __________ position and the seller of a futures
contract is said to have a __________ position in futures.
A. long; short
B. long; long
C. short; short
D. short; long
E. margined; long

4. A trader who has a __________ position in wheat futures believes the price of wheat will
__________ in the future.
A. long; increase
B. long; decrease
C. short; increase
D. long; stay the same
E. short; stay the same

5. Which one of the following statements regarding delivery is true?

A. Most futures contracts result in actual delivery.
B. Only one to three percent of futures contracts result in actual delivery.
C. Only fifteen percent of futures contracts result in actual delivery.
D. Approximately fifty percent of futures contracts result in actual delivery.
E. Futures contracts never result in actual delivery.

Department of Banking and Finance Graduate Program

6. You hold one long corn futures contract that expires in April. To close your position in corn
futures before the delivery date you must
A. buy one May corn futures contract.
B. buy two April corn futures contract.
C. sell one April corn futures contract.
D. sell one May corn futures contract.
E. none of the above.

7. You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at
maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000
ounces and there are no transactions costs.
A. $5.50 profit
B. $5,500 profit
C. $5.50 loss
D. $5,500 loss
E. none of the above.

8. You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at
maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is
5,000 ounces and there are no transactions costs.
A. $30 profit
B. $300 profit
C. $300 loss
D. $30 loss
E. none of the above.