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Chapter Fifteen

Markets for Options and Contingent Claims

This chapter contains 50 multiple choice questions, 15 short problems, and 9 longer problems.

Multiple Choice

1. An option to buy a specified item at a fixed price is a(n) ________; an option to sell is a ________.

(a) put; call

(b) spot option, call (c) call; put

(d) put; spot option

Answer: (c)

2. A(n) ________ option can be exercised up to and on the expiration date, whereas a(n) ________

option can only be exercised on the expiration date.

(a) American-type; Bermudan-type (b) American-type; European-type (c) European-type; American-type (d) Bermudan-type; European-type

Answer: (b)

3. The difference between exercise price and current stock price is the tangible value of an ________,

and the difference between the current stock price and exercise price is the tangible value of an ________.

(a) out of the money put option; in the money call option (b) in the money put option; out of the money call option (c) in the put money option; at the money call option (d) at the money put option; in the money put option

Answer: (b)

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4. A call option is said to be “out of the money” if its ________.

(a) exercise price is equal to the price of the underlying stock (b) current stock price is greater than its strike price (c) strike price is greater than the current stock price (d) strike price is less than its current stock price

Answer: (c)

5. The time value of an option is ________.

(a) the difference between an option’s stock price and its tangible value (b) the difference between the current stock price and exercise price (c) the difference between the exercise price and the stock price

(d) the difference between an option’s market price and its tangible value

Answer: (d)

6. The prices of puts are ________ the higher the exercise price, and the prices of calls are ________ the

higher is the exercise price.

(a) lower; higher (b) higher; lower (c) lower; lower (d) higher; higher

Answer: (b)

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Questions 7 through 10 refer to the following hypothetical information: Listing of LePlastrier Options (symbol: LLB) (Prices listed are closing prices.) February 27, 2009 CALLS Stock Price on NYSE 109.75 109.75 109.75 PUTS Stock Price on NYSE 109.75 109.75 109.75 Exercise Price 107 110 113 January 1.75 3.625 9 February 3.375 5.875 10 April 5.875 7.375 11.75 Exercise Price 107 110 113 January 3.375 0.625 0.125 February 5.625 2.1875 0.875 April 7.125 4.875 2.375

7. What is the tangible value of the April LLB 110 put?

(a) 0 (b) 0.25 (c) 3.25 (d) 7.375

Answer: (b)

8. What is the tangible value of the February LLB 107 call?

(a) 0 (b) 5.625 (c) –0.75 (d) 2.75

Answer: (d)

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