As you see, there are 127 questions. I hope your hard work on this take-home will also help for in-class test. Good-luck.

Transcription

1 As you see, there are 127 questions. I hope your hard work on this take-home will also help for in-class test. Good-luck. MULTIPLE CHOICE TEST QUESTIONS Consider a stock priced at $30 with a standard deviation of.3. The continuousely compounded risk-free rate per annum is.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through What is your profit if you buy a call, hold it to expiration and the stock price at expiration is $37? a. $700 b. -$289 c. $2,711 d. $ What is the breakeven stock price at expiration on the transaction described in problem 1? a. $32.89 b. $30 C. $27.11 d. $32.15 e. there is no breakeven 3. What is the maximum profit on the transaction described in problem 1? a. $2,711 b. infinity C. zero d. $3,289 e. $3, What is the maximum profit that the writer of a call can make? a. $2,711 b. $289 C. $3,000 d. $3, Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33. How much profit would the buyer make? Assume the interest rate was not changed. (Use a spreadsheet program (not textbook table4.2) to find N(x). For example, you may use the in EXCEL). a. $32 b. $30 C. $78 d. $11 e. $8 6. If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?

2 a. $600 b. $311 C. $889 d. $229 e. $ What is the minimum profit from the transaction described in Question 6 if the position is held to expiration? a. -$2,711 b. -$3,289 C. -$3,000 d. negative infinity 8. Consider two put options differing only by exercise price. The one with the higher exercise price has a. the lower breakeven and lower profit potential b. the lower breakeven and greater profit potential C. the higher breakeven and greater profit potential d. the higher breakeven and lower profit potential e. the greater premium and lower profit potential 9. Which of the following transactions does not profit in a strong bull market. a. a short put b. a covered call C. a protective put d. a synthetic call 10. Which of the following is equivalent to a synthetic call? a. a long stock and a short put position b. a long put and a long stock position C. a long put and a short risk-free bond position d. a long stock and a short risk-free bond position 11. Early exercise imposes a risk to all but one of the following transactions. a. a short call b. a short put C. a protective put d. an uncovered call 12. Each of the following is a bullish strategy except a. a long call b. a short put C. a short stock d. a protective put 13. Which of the following strategies has the greatest potential loss? a. an uncovered call b. a long put C. a covered call d. a long position in the stock e. it is impossible to tell

3 14. Which of the following strategies has essentially the same profit diagram as a covered call? a. a long put b. a short put C. a protective put d. a Ion,, call 15. Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price? a. the breakeven is lower b. the maximum loss is greater C. the insurance is less costly d. the insurance is more costly 16. What is the disadvantage of a strategy of rolling over a covered call to avoid exercise? a. the call premium is essentially thrown away b. transaction costs tend to be high C. the stock will incur losses d. the call is more expensive when rolled over 17. Which of the following is the breakeven for a protective put? a. E + S 0 - P b. p + S 0 C. E - S T d. E - S 0 - P 18. The difference in profit from an actual put and a synthetic put is a. E b. S, - E C. E - S, d. S T + E(I + r) -T 19. A covered call writer who prefers even less risk should a. get rid of the call b. switch to a call with a lower exercise price c. get rid of the stock d. switch to a call with a higher exercise price 20. Which of the following investors may be obligated to buy stock? a. covered call writer b. call buyer C. put writer d. protective put buyer

4 The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the standard deviation is.35. The March options have 90 days remaining and the June options have 180 days remaining. Calls Puts Strike March June March June Use this information to answer questions 21 through 37. Assume that each transaction consists of one contract (100 options) unless otherwise indicated. For questions 21 through 26, consider a bull money spread using the March 45/50 calls. 21 How much will the spread cost? a. $986 b. $302 C. $283 d. $ What is the maximum profit on the spread? a. $500 b. $802 C. $198 d. $ What is the maximum loss on the spread? a. $500 b. $698 C. $198 d. $ What is the profit if the stock price at expiration is $47? a. -$102 b. $398 C. -$302 d. $ What is the breakeven point? a. $48.02 b. $41.98 C. $55.66 d. $ Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50? Assume the interest rate was not changed. (Use a spreadsheet program (not textbook table4.2) to find N(x). For example, you may use the in EXCEL).

5 a. $41 b. $198 C. $302 d. $102 For questions 27 and 28, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. 27. What will be the cost of the butterfly spread? a. $1,195 b. $637 C. $79 d. $1, What will be the profit if the stock price at expiration is $52.50? a. $171 b. $1,421 C. $1.037 d. $421 Answer questions 29 through 34 about a long straddle constructed using the June 50 options. 29. What will the straddle cost? a. $145 b. $690 C. $971 d. $ What are the two breakeven stock prices at expiration? a. $55-58 and $45.87 b. $54-13 and $45.87 C. $55.58 and $44.42 d. $59-71 and $ What is the profit if the stock price at expiration is at $64.75? a. -$971 b. $1,475 C. -$3,525 d. $ What is the profit if the position is held for 90 days and the stock price is $55? a. -$971 b. -$58 C. -$109 d. -$ Suppose the investor adds a call to the long straddle, thus creating a strap. What will this do to the breakeven stock prices?

6 a. lower both the upside and downside breakevens b. raise both the upside and downside breakevens C. raise the upside and lower the downside breakevens d. lower the upside and raise the downside breakevens 34. Determine the profit at expiration on a strip if the stock price at expiration is $36. a. -$129 b. $1,416 C. $429 d. $1,384 Answer questions 35 through 37 about a long box spread using the June 50 and 55 options. 35. What is the cost of the box spread? a. $500 b. $2,018 C. $76 d. $ What is the profit if the stock price at expiration is $52.50? a. $16 b. $500 C. -$234 d. $ What is the net present value of the box spread? a. $9.84 b. $5 C. $16 d. $ Which of the following strategies does not profit in a rising market? a. put bull spread b. long straddle C. long butterfly spread d. call bull spread 39. Which of the following transactions can have an unlimited loss? a. long straddle b. calendar spread C. butterfly spread. d. reverse box spread 40. Which of the following is the best strategy for an expected fall in the market? a. long strip b. put bull spread C. calendar spread d. butterfly spread

7 41. Early exercise is a disadvantage in which of the following transactions? a. short box spread b. put bear spread C. long strip d. long strap 42. Which of the following have similar profit graphs? a. call bull spread and long box spread b. put bear spread and short box spread C. butterfly spread and ratio spread d. calendar spread and call bear spread 43. Which of the following is not a futures exchange? a. Minneapolis Grain Exchange b. New York Board of Trade C. Coffee, Sugar and Cocoa Exchange d. Philadelphia Board of Trade e. MidAmerica Commodity Exchange 44. Which of the following contract terms is not set by the futures exchange? a. the dates on which delivery can occur b. the expiration months C. the deliverable commodities d. the size of the contract e. the price 45. Which of the following organizations has the ultimate regulatory authority in the futures industry. a. National Futures,Association b. Commodity Futures Trading Commission C. Commodity Exchange Authority d. Securities and Exchange Commission 46. Margin in a futures transaction differs from margin in a stock transaction because a. stock transactions are much smaller b. delivery occurs immediately in a stock transaction C. no money is borrowed in a futures transaction d. futures are much more volatile 47. If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $4,000, how much must you deposit? a. $6,000 b. $1,500 C. $9,000 d. nothing 48. The number of futures contracts outstanding is called the a. reportable position b. minimum volume C. open interest d. spread position

8 49. Most futures contracts are closed by a. delivery b. offset C. exercise d. default 50. Most forward contracts are closed by a. delivery b. offset C. exercise d. default 51. Which of the following is not a forward contract? a. a lono-term employment contract at a fixed salary b. an automobile lease non-cancelable for three years C. a rain check d. a signed contract to buy a house in six months 52. A Eurodollar futures contract quoted at has an actual price per $1,000,000 of a. $986,375 b. $945,500 C. $1,054,500 d. $54, Variation margin is which of the following? a. the difference in margin between hedger and speculator b. margin differences according to trading style C. margin deposited as a result of marking-to-market d. margin set by the variability of a futures price 54. Which of the following duties is not performed by the clearinghouse? a. holding margin deposits b. guaranteeing performance of buyer and writer C. maintaining records of transactions d. lending money to meet margin requirements 55. What are circuit breakers? a. rules that stop trading when futures are about to expire b. a system that shuts down the exchange computer during periods of abnormal volume C. limits on the number of contracts that can be traded on high volume days d. rules that limit the number of contracts a speculator can hold 56. An after-hours computerized trading system at the CME is called a. COMEX b. GLOBEX C. LIFFE

9 d. CFTC 57. Trading as both a broker and a dealer is called a. dual trading b. spreading C. scalping d. arbitraging 58. The trading procedure on the floor of the futures exchange is refer-red to as a. against actuals b. open interest C. open outcry d. index participation 59. One of the advantages of forward markets is that a. performance is guaranteed by the G-30 b. trading is conducted in the evening over computers C. the contracts are private and customized d. trading is less costly and governed by more rules T F 1. The maximum loss on a call purchase is the premium on the call. T F 2. Buying a put is the mirror image of buying a call. T F 3. Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price. T F 4. To maximize profits on a call purchase, one should hold the position for as short a time as possible. T F 5. Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration. T F 6. A covered call writer will make a lower profit if the option is exercised early. T F 7. The holder of a protective put has the equivalent of an insurance policy on the stock. T F 8. A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market. T F 9. An investor can construct a synthetic put by buying a call and selling short a stock.

10 T F 10. An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not. T F 11. The profit for a long put is higher for a given stock price if the put is sold back prior to expiration. T F 12. Given two bearish investors, the more risk averse investor would tend to select a put with a higher exercise price. T F 13. Both call and put writers have the potential for unlimited losses. T F 14. In the context of insurance, protective put buyers who choose lower exercise prices are using higher deductibles. T F 15. As long as puts are available for trading, there is little justification for constructing synthetic puts. T F 16. To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium. T F 17. Covered call writing should be considered a strategy to enhance the return on a stock. T F 18. A protective put provides the same type of profit diagram as a long call. T F 19. A covered call with a higher exercise price has a higher breakeven. T F 20. The profit from a covered call is the profit from a long stock plus the profit from a long call. T F 21. A synthetic put is always less expensive than a synthetic call. T F 22. Any strategy consisting of only long the same class of options will lose money if the stock price stays the same. T F 23. The breakeven for a protective put is the same as that for a covered call. T F 24. A spread that is profitable if the options are in-the-money is called a money spread. T F 25. Buying a put money spread is a bearish strategy. T F 26. A call bear spread is a strategy for investors who expect stock prices to increase. T F 27. A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration. T F 28. There are three breakeven stock prices in a butterfly spread. T F 29. Early exercise is an important risk when call bear spreads and put bull spreads are used.

11 T F 30. A call butterfly spread combines a call bull spread with a call bear spread. T F 31. A call butterfly spread is a bullish strategy that is profitable if stock prices increase. T F 32. One of the risks of a calendar spread is that the intrinsic values may be different. T F 33. The holder of a straddle does not care which way the market moves as long as it makes a significant move. T F 34. If a straddle is closed prior to expiration, the investor can recover some of the time value of either the call or the put but not both. T F 35. An investor who holds a strap believes the market is more likely to go up than down. T F 36. A strip is a slightly bearish variation of a straddle. T F 37. The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread. T F 38. The risk of early exercise is of no concern to the holder of a long straddle. T F 39. At the expiration of a box spread, at most there will be only one option exercised. T F 40. A box spread is a combination of a call bull spread and a put bear spread. T F 41. A box spread is a good strategy to use if high volatility is expected. T F 42. The delta of a straddle would be the call delta plus the put delta. T F 43. A strap is a less expensive bullish strategy than a straddle. T F 44. A calendar spread is best executed before the end of the calendar year. T F 45. A ratio spread can be conducted with money spreads or time spreads. T F 46. To truly gain from a straddle, an investor must have a better estimate of volatility than everyone else. T F 47. Futures contracts are similar to forward contracts because they both represent a commitment to buy something at a future time at a fixed price. T F 48. Forward contracts are regulated by the Commodity Forward Trading Commission. T F 49. The earliest financial futures contracts were futures on foreign currencies.

12 T F 50. Credit risk is handled in forward markets by daily marking-to-market. T F 51. Many futures contracts specify that there are several grades of a commodity that are acceptable for delivery. T F 52. Very few futures contracts are terminated in delivery of the underlying commodity or security. T F 53. Stock index futures contracts are terminated by delivery the portfolio of stocks represented by the index. T F 54. A limit move is when a futures price reaches its all time high or low price. T F 55. Locals are futures traders who are in business for themselves. T F 56. Scalping is a colorful term used to describe a futures trading style that involves aggressive, emotional trading. T F 57. Futures trades are executed in the pit. T F 58. When futures accounts are marked-to-market, an account balance below the maintenance margin must be brouoht up to the initial margin. T F 59. The most actively traded futures contract on a short-term financial instrument is Treasury bill futures. T F 60. Futures funds have typically provides outstanding returns to their investors. T F 61. Because futures markets do not have designated market makers, there is no such thing as a bid-ask spread. T F 62. One party to a futures transaction does not bear the risk that the other party will default. T F 63. The federal regulator of the futures markets is the National Futures Association. T F 64. Though most futures trading in the United States occurs during, the day, some contracts are traded at night as well. T F 65. Firms that solicit futures trading business from the public are called Futures Commission Merchants. T F 66. Position traders are futures traders who take very large positions. T F 67. The daily settlement procedure is a major difference between futures contracts and forward contracts. T F 68. When delivery takes place, the holder of the long position specifies which commodity he or she will accept.