Reference no: EM132459615

Question 1: Options are not an actual security. True or False?

(A) True

(B)False

Question 2: Last month when IBM was selling for $86, Dan purchased a call option on IBM with an exercise price of $90 for $2 per option or $200 total. Yesterday IBM closed at $95. Based on the minimum value of the contract, if Dan sells his call at yesterday's close, what would his return be?

(A) 4%

(B) 6%

(C) 50%

(D) 150%

(E) 250%

Question 3: Factors that should be considered in taking a stock option position include

(A) the anticipated direction of market movement

(B) the time to expiration

(C) the volatility of the underlying stock

(D) all of the above are relevant factors in the option decision

(E) the dividend paid on the underlying stock

Question 4: Options are available on

(A) market indices

(B) exchanged traded funds

(C) credit events

(D) volatility indices

(E) all of the above all of the above

Question 5: The premium paid by the buyer of an option is the maximum amount the buyer can lose even if the stock falls to zero. True or false?

(A) True

(B) False

Question 6: Under what circumstances can the writer of a call option expect to profit?

(A) Stock price declines

(B) Stock prices remain the same

(C) The increase in stock price is less than the premium

(D) All of the above

Question 7: When index option is exercised, settlement is made by cash payment, not delivery of shares. True or false?

(A) True

(B) False

Question 8: Emily wrote an uncovered call option with an exercise price of $40 and received $300 for the contract. When the price of the stock reached $55, the call option holder decided to exercise the call. Ignoring commissions and taxes, what would Emily's dollar return on this investment be?

(A) $(5,200)

(B) $(1,200)

(C) $(1,500)

(D) $(1,800)

(E) $+1,800

Question 9: A call is said to be "in-the-money" when the strike price is _____ the market price;

(A) Equal to

(B) Greater than

(C) Less than

(D) May be more than one of the above depending on the option premium

Question 10: Uses of options include

(A) Possibility of hedging

(B) Limiting exposure to risk

(C) Profitability

(D) all of the above are uses of options

(E) A and C are uses, but B is not

Question 11: The value of the put option will decrease in value as the share price falls. True or false?

(A) True

(B) False

Question 12: Caroline pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Three years ago, she purchased 100 shares of XYZ, Inc. for $70. In January, Caroline wrote a six month put option on the stock at an exercise price of $90 and received $500. Three days after the purchase, the price of XYZ dropped significantly and has not been above $80 since. The result is that the put buyer chose not to exercise her put. Ignoring commissions, Caroline's tax on this transaction is

(A) $175

(B) $225

(C) $325

(D) $75

(E) $650

Question 13: Hedging with options can give protection against loss or the stock protects the option against loss. True or false?

(A) True

(B) False

Question 14: The option writer determines when/if an option is exercised. True or False?

(A) True

(B) False

Question 15: The strike price refers to the premium paid by the option buyer for the right to exercise the option. True or false?

(A) True

(B) False

Question 16: Kate owns 1,000 shares of Pills Drug Firm and has heard rumors that the firm is about to be investigated by the Food and Drug Administration (FDA). She believes the stock value will decline as this news becomes more widespread, but she also believes that this is a good company that can withstand any investigation. Kate should

(A) buy a call

(B) buy a put

(C) buy a bond issued by the firm

(D) buy a warrant

(E) sell her shares

Question 17: Henry pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Five years ago, Henry purchased 100 shares of ABC, Inc. for $42 a share. Three months ago, Henry wrote a call option on the shares with an exercise price of $55 a share and received $1,000 for the contract. Yesterday, when the market price of the stock was $70, the call buyer exercised his option to purchase the shares from Henry. Ignoring commissions, what would Henry's taxes on this transaction be?

(A) $545

(B) $570

(C) $345

(D) $805

(E) $605

Question 18: An option provides a right to the writer and an obligation to the buyer. True or False?

(A) True

(B) False

Question 19: Option premium is used to describe the market price of option. True or false?

(A) True

(B) False

Question 20: An American option may be exercised only at maturity. True or false?

(A) True

(B) False