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Terms in this set (63)
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.
C. tax status
D. power of attorney
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.
C. stock index
The price of an option contract paid to the writer is known as the
b. percentage spread
D. exercise price
The intrinsic value of an option is the value if it were exercised
B. only at the expiration date
C. out-of-the money
The term ____ indicates that the option writer does not own the underlying stock on which the option is written.
c. covered call writing
d. European option
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.
any time during the life
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.
The market that is a zero-sum game is the
a. common stock.
b. preferred stock.
d. Treasury bill.
For an option, the exercise price is also called the
a. striking price.
b. booking price.
c. market value.
d. spot price.
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.
Have a price rise
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.
premium on the put option
The purchaser of a put option expects the stock price to
c. remain level.
As compensation for the risk of an option writer, the option purchaser will pay
a. a commission.
b a cash dividend.
c. an intrinsic value.
d. a premium.
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.
The lower value for a call option
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.
if the market price is greater then the exercise price
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.
right to sell shares
Buying and selling a call option on the same stock with the same strike price and expiration date is a
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?
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?
The Option Clearing Corporation created the ______ system to protect itself from the actions of the writers.
C. order book
D. option pricing
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
increase in the dividend rate of the underlying stock
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.
Through open outcry
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
decrease in the announced dividend amount
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. $ 6
(e) .$ 0.
The percentage of the premium that the buyer of a call option is allowed to borrow through margin is
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.
Both options have the same exercise price and the same expiration dates
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?
Passive bond portfolio managers assume the bond market is
(a) semi-strong form efficient.
(c) strong form efficient.
(d) not correlated with the stock market.
semi-strong form efficient
The length of time until a bond will make its last payment is its
(a) coupon rate.
(c) promised yield-to-maturity.
Term to maturity
___ is the tendency for the bond prices to change asymmetrically relative to yield
If a bond's price is above its par value, its coupon rate will be
(a) equal to its term-to-maturity.
(b) greater than its yield-to-maturity.
(c) equals its yield-to-maturity.
(d) greater than its term-to-maturity.
Greater than its yield to maturity
If a bond's market price decreases, its
(a) yield-to-maturity increases.
(b) coupon rate decreases.
(c) yield-to-maturity decreases.
(d) coupon rate decreases.
yield to maturity increases
A pricing theorem for the bond market states that if a bond's yield does not change
over its life, then the size of its discount or premium will ___ as its life gets shorter.
(b) slightly increase.
(d) stay the same.
A pricing theorem for the bond market states that if a bond's yield does not change
over its life, then the size of its discount or premium will ___ at an increasing rate as its life gets shorter.
(a) slightly increase.
(c) slightly decrease.
Duration is a ___ of the lengths of time until remaining payments are made.
(a) weighted average. (b) moving average.
(c) sensitivity measure.
(d) arithmetic average.
___ is a measure of average maturity of the stream of payments associated with a bond.
(a) Cash flow matching. (b) Pure yield pickup.
(c) Contingent immunization.
(a) uses the immunization amount as a benchmark to see if the manager can continue to actively manager.
(b) allows the manager to actively manage at all time.
(c) combines active and passive bond management at the same time.
(d) requires duration matching at all times.
combines active and passive bond management at the same time
Holding maturity constant, a bond's duration is ___ when the coupon rate is lower.
(c) the same.
(d) slightly higher.
Immunization is accomplished by calculating the duration of the promised outflows and
then investing in a portfolio of bonds that has a(n) ___ duration.
(d) slightly shorter.
A 5 year, zero-coupon bond has a maturity of $1,000 and a present market price of $713. Its duration in years is
___ management of a bond portfolio is based on the belief that the bond market is not
____ buy and sell futures contracts to offset an otherwise risky position in the spot market.
b. Floor brokers
c. Market makers
The concepts of immunization and duration are limited by the assumption that the bonds will
(a) default at some future date.
(b) not default or be called before maturity.
(c) not be callable bonds.
(d) have a realized yield that equals the coupon rate.
not default of be called for maturity
Unlike an options contract, futures contracts ____ that both parties involved do something at the end of the life of the contract.
B. do not require
c. remain unclear
A bond has a duration of 8 years and a present yield-to-maturity of 8%. If the yield-to-maturity rises to 10%, the approximate bond price change would be
Positive convexity on a bond implies that
(a) price increase at a faster rate as yields drop, than they decrease as yield
(b) the direction of change in yield is directly related to change to price.
(c) price changes are the same for both increase and decrease in yields.
(d) price increase and decrease at a faster rate than the change in yield.
price increase at a faster rate yields drop then they decrease as yield increases
.Which of the following statement about the Macaulay duration of a zero-coupon bond is true? The Macaulay duration of a zero coupon bond
(a) is equal to one-half the bond's maturity in years.
(b) is equal to the bond's maturity in years divided by its yield to maturity.
(c) cannot be calculated because of the lack of coupons.
(d) is equal to the bond's maturity in years.
is equal to the bonds maturity in years
A pension plan will have a cash outflow in 3
years. They can invest in 2 year bonds with duration of 1.7 years and 4 year bonds with a duration of 3.5 years. To immunize
the portfolio, the proportion invested in the 4 year bonds should be
______________ of futures markets.
A. Hedging is a use
B. Hedging and speculation are both uses
C. Speculation is a use
D. Margin buying of futures contracts is a use
hedging and speculation are both used
Futures contracts are standardized in terms of ____ as well as the type of asset that is permissible for delivery.
The process of adjusting the equity in an investor's account in order to reflect the change in the daily settlement price of the futures contract is known as
a. normal contango
b. the triple witching hour
c. marking to market
D. hedging long
marking to market
The difference between the current spot price of an asset and the corresponding futures price is known as the ___ for the futures.
b. cost of carry
d. index arbitrage
In order to insure stability, organized futures exchanges have standardized all of the following EXCEPT
A. market price
B. time of delivery
C. initial margins
D. contract size
A fried chicken restaurant buys chicken futures. It is a
a. long hedger.
b. mixed investor.
c. long speculator.
d. short speculator.
A CBT futures contract specifies the
a. week of delivery.
b. year of delivery.
c. month of delivery.
d. quarter of delivery.
At the CBT, futures contracts are traded by
a. secret ballot.
b. computer matching.
c. market makers.
d. open outcry.
To protect itself, the futures clearinghouse requires
a. margin from the seller only.
b. 100% of the value from the seller.
c. margin from both the buyer and seller.
d. margin from the buyer only.
margin from both the buyer and seller
The quarterly expiration of options on individual stocks, futures on market indices and options on market index futures is called
b. triple truth or dare.
c. May Day.
d. triple witching hour.
triple witching hour
Which one of the following is an example of a long hedger?
A. an oil refinery buying crude at spot oil prices
B. a farmer who grows wheat and sells futures contracts short
C. a trader who transacts in futures for the sole purpose of making profits
D. a cereal producer who purchases wheat futures contracts
a coral producer who purchases wheat future contracts
The basis for a futures contract is
a. current spot price/futures price.
b. futures price X current spot price.
c. current spot price - futures price.
d. Futures price/current spot price.
current spot price- future price
What organized exchange mechanism reassures the futures buyer and seller that the obligations of the other party will be fulfilled?
A. the clearinghouse
B. the initial margin
C. marking to market
D. the maintenance margin
the clearing house
If funds rise above the initial margin requirement as a result of marking to market, they may be
a. automatically rolled over to purchase more of the same futures contracts
B. withdrawn by the clearinghouse and placed in an interest-bearing account
C. used to satisfy undermargined positions in other contracts
d. withdrawn by the investor
withdrawn by an investor
Futures contracts differ from forward contracts in that ________.
A. futures contracts are standardized and performance of each party is guaranteed by the clearinghouse
B. futures contracts are standardized and require a daily settling of any gains or losses
C.futures contracts are standardized, performance of each party is guaranteed by a clearing house, and they require a daily settling of any gains or losses
D. performance is guaranteed by a process known as marking to market
futures contracts are standardized, performance of each party is guaranteed by the clearing house and they require a daily settling of any gains or losses
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