Quiz 1: What Are Derivatives And More
The first quiz for MBA 627
- 1.If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration, then the option:
- A.
Expires worthless
- B.
Will not be exercised
- C.
Is worth $7 per share
- 2.What is the option buyer's total profit or loss per share if a call option is purchased for a $5 premium, has a $50 exercise price, and the stock is valued at $53 at expiration?
- A.
($5)
- B.
($2)
- C.
$3
- 3.Which combination of positions will tend to protect the owner from downside risk?
- A.
Buy the stock and buy a call option
- B.
Sell the stock and buy a call option
- C.
Buy the stock and buy a put option
- 4.If you expected a stock to fall but wanted to hold on to the stock due to the voting rights, you would be wise to _____.
- A.
Buy a call option
- B.
Go long the stock
- C.
Buy a put option
- D.
Write a put option
- 5.Which of the following is NOT correct?
- A.
A call gives you the right and the obligation to buy the underlying asset
- B.
A put gives you the right, but not the obligation to sell the underlying asset
- C.
Being short an option creates an obligation
- D.
The profit for a call holder is less than the payoff
- 6.Forwards and futures are similar in many ways, however not in all ways. Which of the following is true?
- A.
Forwards have daily cash settlement.
- B.
Forwards are more apt to be exchange traded
- C.
Futures are less standardized
- D.
Futures are easier to trade
- 7.The payoff to a long futures contract is _______.
- A.
Most similar to the payoff to a call contract, but the futures payoff can also be negative.
- B.
Most similar to the payoff to a put contract, but the futures payoff can also be negative.
- C.
Most similar to writing a call contract. (being short a call).
- D.
A line that slopes down from left to right at a 45% angle.
- 8.Suppose you write a call contract for $4 a share on XYZ stock with a strike of $25. What is you PROFIT of this position if stock at expiration is $24?
- A.
A loss of $400 (4 dollars per share * 100 shares per contract)
- B.
A gain of $400 ($4 per share * 100 shares per contract)
- C.
Impossible to tell since you do not the price of the call when you sold it.
- D.
$300 (400 - 100)
- 9.Suppose the following: Strike price is $25, stock price is $30. The option expires tomorrow. Which of the following is true?
- A.
A put contract with the above facts is "in the money"
- B.
A call contract with the above facts is "out of the money"
- C.
The value of the option would be slightly greater than its intrinsic value
- D.
More than one of the above is true
- 10.Suppose the following: Strike price is $25, stock price is $30. The option expires in two hours. Which of the following is true?
- A.
If the contract is a call option, its payoff if exercised now is $5.00
- B.
If the contract is a put option, it can not be profitably exercised at present.
- C.
If it is a put option, you would let it expire worthless.
- D.
More than one of the above are true
- 11.Suppose you own 3000 shares of ABC company stock. You believe the stock is likely to fall. You decide to write call contracts on the shares and buy put contracts. (full coverage in each direction). Suppose the call price is $4 and the put price is $2. (different strikes). Further suppose that each contract ends up out of the money. What is your net profit (loss) from the trades?
- A.
$18,000 profit
- B.
$12,000 loss
- C.
$$12,000 gain
- D.
None of the above
- 12.If you are looking to hedge your short position in oil, which of the following would be the best alternative?
- A.
Shorting a call option on oil
- B.
Buying a call option on oil
- C.
Writing a put option on oil
- D.
Selling an oil futures contract
- 13.Which one do you like?
- A.
Option 1
- B.
Option 2
- C.
Option 3
- D.
Option 4
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