Chapter 20 Quiz, Understanding Options
1.
Which of the following is/are call options?
A.
The abandonment option on an investment project
B.
Stand-by underwriting
C.
A and B
D.
The company's option to redeem its bonds at a premium before maturity
2.
Which of the following investors would be happy to see the stock price rise sharply?
A.
An investor who owns a call option
B.
An investor who owns a put option
C.
An investor who owns the stock and has sold a call option
D.
An investor who has sold a call option
3.
Suppose an investor sells a put option. What will happen if the stock price on the exercise date exceeds the exercise price?
A.
The seller will need to deliver stock to the owner of the option
B.
The seller will be obliged to buy stock from the owner of the option
C.
The owner will not exercise his option
D.
None of the above
4.
Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price?
A.
The value of two shares of stock
B.
The value of one share of stock plus the exercise price
C.
The exercise price
D.
The value of one share of stock minus the exercise price
5.
A put gives the owner the right
A.
And the obligation to buy an asset at a given price
B.
And the obligation to sell an asset at a given price
C.
But not the obligation to buy an asset at a given price
D.
But not the obligation to sell an asset at a given price
6.
The buyer of a call option has the choice to exercise, but the writer of the call option has:
A.
The choice to offset with a put option
B.
The obligation to deliver the shares at exercise
C.
The choice to deliver shares or take a cash payoff
D.
The choice of exercising the call or not
7.
Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?
A.
Above the exercise price if the stock price rises and below the exercise price if it falls
B.
Equal to the exercise price regardless of the stock price
C.
Equal to zero regardless of the stock price
D.
Below the exercise price if the stock price rises and above if it falls
8.
The maximum value of a call is equal to:
A.
The price of the stock minus the exercise price
B.
The exercise price times one plus the risk free return
C.
The price of the stock
D.
All of the above
9.
The higher the exercise price:
A.
The higher the call price
B.
The lower the call price
C.
Has no effect on call price
D.
The higher the stock price
10.
Which of the following features increase(s) the value of a call option?
A.
A high interest rate
B.
A long time to maturity
C.
A highly variable stock price
D.
All of the above
11.
If the volatility of the underlying asset decreases, then the:
A.
Value of the put option will increase, but the value of the call option will decrease
B.
Value of the put option will decrease, but the value of the call option will increase
C.
Value of both the put and call option will increase
D.
Value of both the put and call option will decrease
12.
Which of the following statements is true?
A.
For both calls and puts an increase in the exercise price will cause an increase in the option price
B.
For both calls and puts an increase in the time to maturity will cause an increase in the option price
C.
For calls, but not for puts, an increase in the time to maturity will cause an increase in the option price
D.
For puts, but not for calls, an increase in the time to maturity will cause an increase in the option price
13.
Suppose Sarah's stock price is currently $50. In the next six months it will either fall to $30 or rise to $80. What is the option delta of a call option with an exercise price of $50?
A.
0.375
B.
0.500
C.
0.600
D.
0.75
14.
Suppose David's stock price is currently$20. In the next six months it will either fall to $10 or rise to $30. What is the current value of a put option with an exercise price of $12? The six-month risk-free interest rate is 5% (periodic rate).
A.
$9.78
B.
$2.00
C.
$0.86
D.
$9.43
15.
The Black-Scholes OPM is dependent on which five parameters?
A.
Stock price, exercise price, risk free rate, beta, and time to maturity
B.
Stock price, risk free rate, beta, time to maturity, and variance
C.
Stock price, risk free rate, probability, variance and exercise price
D.
Stock price, exercise price, risk free rate, variance and time to maturity
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