Ch.19, Chapter 19: OPTIONS
Multiple Choice Questions
1. Put and call options on gold are considered:
a. Commodity derivatives
b. Financial derivatives
c. Forward contracts
d. Futures contracts
Ans: a
Difficulty: Easy
Ref: Overview
2. One important reason for the existence of derivatives is that they:
a. help lower transactions costs.
b. have valuable tax benefits.
c. contribute to market completeness.
d. are risk-free.
Ans: c
Difficulty: Moderate
Ref: Why Have Derivative Securities?
3. Which of the following is not a reason for investors to participate in
options?
a. Options eliminate leverage.
b. Options are a smaller investment than stock investments.
c. Options allow investors to trade on the overall market movements.
d. Options can reduce risk.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
4. The standard option contract is for:
a. 10 shares of stock
b. 50 shares of stock
c. 100 shares of stock
d. 1 share of stock
Ans: c
Difficulty: Easy
Chapter Nineteen 240
Options
,Ref: Introduction to Options
5. To maximize his/her potential upside returns, ceteris paribus, an investor who was
bullish on a particular stock would execute which of the following options strategies:
a. buy calls
b. write calls
c. buy puts
d. write puts
Ans: a
Difficulty: Easy
Ref: Introduction to Options
6. To maximize his/her expected returns, ceteris paribus, an investor who was
bearish on a particular stock would execute which of the following options strategies:
a. buy calls
b. write calls
c. buy puts
d. write puts
Ans: d
Difficulty: Easy
Ref: Introduction to Options
7. A major difference between new shares sold by a corporation and shares sold
under a call option is that:
a. there is no profit or loss under the shares sold under the call.
b. there is no risk to the investor with the call.
c. there is no increase in the shares outstanding with the call.
d. there is no commission to the investor with the call.
Ans: c
Difficulty: Moderate
Ref: Introduction to Options
8. LEAPS are typically:
a. more expensive than short-term options.
b. cheaper than short-term options.
c. only available for major indexes, not individual stocks.
d. long-term options, with maturities often between 5 and 10 years.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
Chapter Nineteen 241
Options
, 9. The exercise price on an option is also known as the:
a. premium.
b. strike price.
c. theoretical value.
d. spot price.
Ans: b
Difficulty: Easy
Ref: Introduction to Options
10. Which of the following statements is true regarding American and European
options?
a. American options can be exercised only at expiration.
b. American options can be exercised only in the last week prior to expiration.
c. European options can be exercised only at expiration.
d. European options can be exercised any time prior to expiration.
Ans: c
Difficulty: Moderate
Ref: Introduction to Options
11. Which of the following statements is true regarding the writer of a call contract?
a. The call writer expects the stock to move upward.
b. The call writer expects the stock to remain the same or move down.
c. The call writer expects the stock to split.
d. The call writer expects to sell the stock prior to expiration of the option.
Ans: b
Difficulty: Difficult
Ref: Introduction to Options
12. To hedge a short sale, an investor could
a. buy a call.
b. write a call.
c. buy a put.
d. write a put.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
13. Options sold on exchanges are protected against
a. stock dividends and splits.
b. cash dividends.
Chapter Nineteen 242
Options
Multiple Choice Questions
1. Put and call options on gold are considered:
a. Commodity derivatives
b. Financial derivatives
c. Forward contracts
d. Futures contracts
Ans: a
Difficulty: Easy
Ref: Overview
2. One important reason for the existence of derivatives is that they:
a. help lower transactions costs.
b. have valuable tax benefits.
c. contribute to market completeness.
d. are risk-free.
Ans: c
Difficulty: Moderate
Ref: Why Have Derivative Securities?
3. Which of the following is not a reason for investors to participate in
options?
a. Options eliminate leverage.
b. Options are a smaller investment than stock investments.
c. Options allow investors to trade on the overall market movements.
d. Options can reduce risk.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
4. The standard option contract is for:
a. 10 shares of stock
b. 50 shares of stock
c. 100 shares of stock
d. 1 share of stock
Ans: c
Difficulty: Easy
Chapter Nineteen 240
Options
,Ref: Introduction to Options
5. To maximize his/her potential upside returns, ceteris paribus, an investor who was
bullish on a particular stock would execute which of the following options strategies:
a. buy calls
b. write calls
c. buy puts
d. write puts
Ans: a
Difficulty: Easy
Ref: Introduction to Options
6. To maximize his/her expected returns, ceteris paribus, an investor who was
bearish on a particular stock would execute which of the following options strategies:
a. buy calls
b. write calls
c. buy puts
d. write puts
Ans: d
Difficulty: Easy
Ref: Introduction to Options
7. A major difference between new shares sold by a corporation and shares sold
under a call option is that:
a. there is no profit or loss under the shares sold under the call.
b. there is no risk to the investor with the call.
c. there is no increase in the shares outstanding with the call.
d. there is no commission to the investor with the call.
Ans: c
Difficulty: Moderate
Ref: Introduction to Options
8. LEAPS are typically:
a. more expensive than short-term options.
b. cheaper than short-term options.
c. only available for major indexes, not individual stocks.
d. long-term options, with maturities often between 5 and 10 years.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
Chapter Nineteen 241
Options
, 9. The exercise price on an option is also known as the:
a. premium.
b. strike price.
c. theoretical value.
d. spot price.
Ans: b
Difficulty: Easy
Ref: Introduction to Options
10. Which of the following statements is true regarding American and European
options?
a. American options can be exercised only at expiration.
b. American options can be exercised only in the last week prior to expiration.
c. European options can be exercised only at expiration.
d. European options can be exercised any time prior to expiration.
Ans: c
Difficulty: Moderate
Ref: Introduction to Options
11. Which of the following statements is true regarding the writer of a call contract?
a. The call writer expects the stock to move upward.
b. The call writer expects the stock to remain the same or move down.
c. The call writer expects the stock to split.
d. The call writer expects to sell the stock prior to expiration of the option.
Ans: b
Difficulty: Difficult
Ref: Introduction to Options
12. To hedge a short sale, an investor could
a. buy a call.
b. write a call.
c. buy a put.
d. write a put.
Ans: a
Difficulty: Moderate
Ref: Introduction to Options
13. Options sold on exchanges are protected against
a. stock dividends and splits.
b. cash dividends.
Chapter Nineteen 242
Options
