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Multiple Choice Quiz
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1
A European put option allows the holder to
A)buy the underlying asset at the striking price on or before the expiration date.
B)sell the underlying asset at the striking price on or before the expiration date.
C)potentially benefit from a stock price increase.
D)sell the underlying asset at the striking price on the expiration date.
E)potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.
2
An American call option allows the buyer to
A)sell the underlying asset at the exercise price on or before the expiration date.
B)buy the underlying asset at the exercise price on or before the expiration date.
C)sell the option in the open market prior to expiration.
D)sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.
E)buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.
3
The maximum loss a buyer of a stock call option can suffer is equal to
A)the striking price minus the stock price.
B)the stock price minus the value of the call.
C)the stock price.
D)the call premium.
E)none of the above
4
The intrinsic value of an out-of-the-money call option is equal to
A)the call premium.
B)the stock price minus the exercise price.
C)zero.
D)the striking price.
E)none of the above
5
The maximum loss the writer of a stock put option can suffer is equal to
A)the striking price minus the put premium.
B)the striking price.
C)the stock price minus the put premium.
D)the put premium.
E)none of the above
6
According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to
A)the call value plus the present value of the exercise price plus the stock price.
B)the present value of the stock price minus the exercise price minus the call price.
C)the call value plus the present value of the exercise price minus the stock price.
D)the present value of the stock price plus the exercise price minus the call price.
E)none of the above
7
Before expiration, the time value of a call option is equal to
A)zero.
B)the actual call price plus the intrinsic value of the call.
C)the intrinsic value of the call.
D)the actual call price minus the intrinsic value of the call.
E)none of the above
8
The value of a stock put option is positively related to the following factors except
A)the time to expiration.
B)the stock price.
C)the striking price.
D)all of the above
E)none of the above
9
The put-call parity theorem
A)allows for arbitrage opportunities if violated.
B)represents the proper relationship between put and call prices.
C)may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.
D)all of the above
E)none of the above
10
A callable bond should be priced the same as
A)a convertible bond.
B)a straight bond plus a call option.
C)a straight bond plus a put option.
D)a straight bond plus warrants.
E)a straight bond.





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