CSU FIN 310 EXAM 3 QUESTIONS & ANSWERS
A ____ grants the owner the right to purchase a specified financial instrument for a
specified price within a specified period of time. - Answers -call option
A ____ requires a premium above and beyond the price to be paid for the financial
instrument. - Answers -call option and put option
A call option is "in the money" when the - Answers -market price of the underlying
security exceeds the exercise price.
A put option is "out of the money" when the - Answers -market price of the security
exceeds the exercise price.
When the market price of the underlying security exceeds the exercise price, the -
Answers -call option is in the money.
When the exercise price exceeds the market price of the underlying security, the -
Answers -put option is in the money.
Sellers (writers) of call options can offset their position at any point in time by - Answers
-buying identical call options.
The ____ is the most important exchange for trading options. - Answers -Chicago
Board of Options Exchange (CBOE)
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts
traded in the United States. - Answers -True
____ execute transactions desired by investors and trade stock options for their own
account. - Answers -Market-makers
A speculator buys a call option for $3, with an exercise price of $50. The stock is
currently priced at $49, and rises to $55 on the expiration date. The speculator will
exercise the option on the expiration date (if it is feasible to do so). What is the
speculator's profit per unit? - Answers -$2
A speculator buys a call option for $3, with an exercise price of $50. The stock is
currently priced at $49, and rises to $55 on the expiration date. What is the stock price
at which the speculator would break even? - Answers -$53
A speculator purchases a put option for a premium of $4, with an exercise price of $30.
The stock is presently priced at $29, and rises to $32 before the expiration date. What is
, the maximum profit per unit to the speculator who owned the put option assuming he or
she exercises the option at the ideal time? - Answers -$3
A speculator purchases a put option for a premium of $4, with an exercise price of $30.
The stock is presently priced at $29, and rises to $32 before the expiration date. What is
the stock price at which the speculator would break even? - Answers -$26
The ____, the higher the call option premium, other things being equal. - Answers -
longer the maturity of the option
The ____, the lower the premium on a put option, other things being equal. - Answers -
higher the existing price of the security relative to the exercise price
The longer the time to maturity, the ____ the call option premium and the ____ the put
option premium. - Answers -higher; higher
The greater the volatility of the underlying stock, the ____ the call option premium and
the ____ the put option premium. - Answers -higher; higher
The sale of a call option on a stock the seller already owns is referred to as - Answers -
a covered call.
Assume a pension fund purchased stock at $53. Call options at a $50 exercise price
presently have a $4 premium per share. The pension fund sells a call option on the
stock it owns. If the call option is exercised when the price of the stock is $56, what is
the gain or loss per share to the pension fund (including its gain from holding the stock
as well)? - Answers -$1 gain
Covered call writing ____ the upside potential return and ____ the risk of an investment
in stock. - Answers -limits; decreases
Put options are typically used to hedge - Answers -when portfolio managers are mainly
concerned with a temporary decline in a stock's value.
A savings institution has long-term fixed rate mortgages supported by short-term funds.
A put option on Treasury bond futures could be used to (ignore the premium paid for the
option when you answer this question) - Answers -maintain its interest rate spread if
interest rates rise, and increase its spread if interest rates fall.
A speculator purchases a put option on Treasury bond futures with a September
delivery date with a strike price of 85-00. The option has a premium of 2-00. Assume
that the price of the futures contract decreases to 82-00 on the expiration date and the
option is exercised at that point (if it is feasible). What is the net gain? - Answers -
$1,000.00
A ____ grants the owner the right to purchase a specified financial instrument for a
specified price within a specified period of time. - Answers -call option
A ____ requires a premium above and beyond the price to be paid for the financial
instrument. - Answers -call option and put option
A call option is "in the money" when the - Answers -market price of the underlying
security exceeds the exercise price.
A put option is "out of the money" when the - Answers -market price of the security
exceeds the exercise price.
When the market price of the underlying security exceeds the exercise price, the -
Answers -call option is in the money.
When the exercise price exceeds the market price of the underlying security, the -
Answers -put option is in the money.
Sellers (writers) of call options can offset their position at any point in time by - Answers
-buying identical call options.
The ____ is the most important exchange for trading options. - Answers -Chicago
Board of Options Exchange (CBOE)
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts
traded in the United States. - Answers -True
____ execute transactions desired by investors and trade stock options for their own
account. - Answers -Market-makers
A speculator buys a call option for $3, with an exercise price of $50. The stock is
currently priced at $49, and rises to $55 on the expiration date. The speculator will
exercise the option on the expiration date (if it is feasible to do so). What is the
speculator's profit per unit? - Answers -$2
A speculator buys a call option for $3, with an exercise price of $50. The stock is
currently priced at $49, and rises to $55 on the expiration date. What is the stock price
at which the speculator would break even? - Answers -$53
A speculator purchases a put option for a premium of $4, with an exercise price of $30.
The stock is presently priced at $29, and rises to $32 before the expiration date. What is
, the maximum profit per unit to the speculator who owned the put option assuming he or
she exercises the option at the ideal time? - Answers -$3
A speculator purchases a put option for a premium of $4, with an exercise price of $30.
The stock is presently priced at $29, and rises to $32 before the expiration date. What is
the stock price at which the speculator would break even? - Answers -$26
The ____, the higher the call option premium, other things being equal. - Answers -
longer the maturity of the option
The ____, the lower the premium on a put option, other things being equal. - Answers -
higher the existing price of the security relative to the exercise price
The longer the time to maturity, the ____ the call option premium and the ____ the put
option premium. - Answers -higher; higher
The greater the volatility of the underlying stock, the ____ the call option premium and
the ____ the put option premium. - Answers -higher; higher
The sale of a call option on a stock the seller already owns is referred to as - Answers -
a covered call.
Assume a pension fund purchased stock at $53. Call options at a $50 exercise price
presently have a $4 premium per share. The pension fund sells a call option on the
stock it owns. If the call option is exercised when the price of the stock is $56, what is
the gain or loss per share to the pension fund (including its gain from holding the stock
as well)? - Answers -$1 gain
Covered call writing ____ the upside potential return and ____ the risk of an investment
in stock. - Answers -limits; decreases
Put options are typically used to hedge - Answers -when portfolio managers are mainly
concerned with a temporary decline in a stock's value.
A savings institution has long-term fixed rate mortgages supported by short-term funds.
A put option on Treasury bond futures could be used to (ignore the premium paid for the
option when you answer this question) - Answers -maintain its interest rate spread if
interest rates rise, and increase its spread if interest rates fall.
A speculator purchases a put option on Treasury bond futures with a September
delivery date with a strike price of 85-00. The option has a premium of 2-00. Assume
that the price of the futures contract decreases to 82-00 on the expiration date and the
option is exercised at that point (if it is feasible). What is the net gain? - Answers -
$1,000.00
