1) Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.Question 1 options:a) Trueb) False2) The writer of a naked call option wantsQuestion 2 options:a) the prices of the stock and the call to riseb) the prices of the stock and the call to fallc) the prices of the stock to fall and the call to rised) the prices of the stock to rise and the call to remain stable3) Stock index options1. permit the investor to short the market instead of individual stocks2. require delivery of an index of stocks3. limit the buyer’s potential loss to the cost of the optionQuestion 3 options:a) 1 and 2b) 1 and 3c) 2 and 3d) all of the above4) Calls tend to sell for a time premium that exceeds the stock’s price.Question 4 options:a) Trueb) False5) The value of a put rises as the price ofQuestion 5 options:a) stock risesb) a call fallsc) stock fallsd) a call rises6) If an investor constructs a covered call,Question 6 options:a) there is no limit to the potential profitb) risk is increasedc) risk is reducedd) the term of the position is increased7) Because of the small cash outlay to buy an option, these securities are considered to be conservative investments.Question 7 options:a) Trueb) False8) Which of the following is premised on lower stock prices?Question 8 options:a) buying a stock index callb) buying a stock index putc) buying a stock and selling a calld) buying a stock and selling a put9) In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).Question 9 options:a) Trueb) False10) A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.Question 10 options:a) Trueb) False11) The Black/Scholes option valuation model divides the option’s strike price by the probability that the option will beexercised.Question 11 options:a) Trueb) False12) An investor cannot buy and sell two different call options with the same expiration dates.Question 12 options:a) Trueb) False13) Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.Question 13 options:a) Trueb) False14) If the hedge ratio is 0.7, the number of call options necessary to offset a long position in a stock is 7.0.Question 14 options:a) Trueb) False15) If investors believe that a stock’s prices will fluctuate but they are not certain as to the direction, these investors may buya straddle.Question 15 options:a) Trueb) False16) According to the Black/Scholes option valuation model, the value of a call option rises as interest rates increase.Question 16 options:a) Trueb) False17) The hedge ratio indicates the number of call options that is necessary to offset price movements in the underlying stock.Question 17 options:a) Trueb) False18) To construct a bear spread, the investor buys a call option and shorts the stock.Question 18 options:a) Trueb) False19) Bull and Bear spreads require taking a long position in one option and a short position in another option with a differentstrike price.Question 19 options:a) Trueb) False20) If the investor anticipates that the price of stock will be stable, he or she mayQuestion 20 options:a) sell a straddleb) buy a straddlec) buy a calld) buy a put
1) Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.Question 1 options:a) Trueb) False2) The writer of a naked call option wantsQuestion 2 options:a) the prices of the stock and the call to riseb) the prices of the stock and the call to fallc) the prices of the stock to fall and the call to rised) the prices of the stock to rise and the call to remain stable3) Stock index options1. permit the investor to short the market instead of individual stocks2. require delivery of an index of stocks3. limit the buyer’s potential loss to the cost of the optionQuestion 3 options:a) 1 and 2b) 1 and 3c) 2 and 3d) all of the above4) Calls tend to sell for a time premium that exceeds the stock’s price.Question 4 options:a) Trueb) False5) The value of a put rises as the price ofQuestion 5 options:a) stock risesb) a call fallsc) stock fallsd) a call rises6) If an investor constructs a covered call,Question 6 options:a) there is no limit to the potential profitb) risk is increasedc) risk is reducedd) the term of the position is increased7) Because of the small cash outlay to buy an option, these securities are considered to be conservative investments.Question 7 options:a) Trueb) False8) Which of the following is premised on lower stock prices?Question 8 options:a) buying a stock index callb) buying a stock index putc) buying a stock and selling a calld) buying a stock and selling a put9) In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).Question 9 options:a) Trueb) False10) A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.Question 10 options:a) Trueb) False11) The Black/Scholes option valuation model divides the option’s strike price by the probability that the option will beexercised.Question 11 options:a) Trueb) False12) An investor cannot buy and sell two different call options with the same expiration dates.Question 12 options:a) Trueb) False13) Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.Question 13 options:a) Trueb) False14) If the hedge ratio is 0.7, the number of call options necessary to offset a long position in a stock is 7.0.Question 14 options:a) Trueb) False15) If investors believe that a stock’s prices will fluctuate but they are not certain as to the direction, these investors may buya straddle.Question 15 options:a) Trueb) False16) According to the Black/Scholes option valuation model, the value of a call option rises as interest rates increase.Question 16 options:a) Trueb) False17) The hedge ratio indicates the number of call options that is necessary to offset price movements in the underlying stock.Question 17 options:a) Trueb) False18) To construct a bear spread, the investor buys a call option and shorts the stock.Question 18 options:a) Trueb) False19) Bull and Bear spreads require taking a long position in one option and a short position in another option with a differentstrike price.Question 19 options:a) Trueb) False20) If the investor anticipates that the price of stock will be stable, he or she mayQuestion 20 options:a) sell a straddleb) buy a straddlec) buy a calld) buy a put
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