Name: e.

b and c
10. Investors who do not consider risk in their
Section: decisions are said to be
CHAPTER 1: INTRODUCTION a. speculating
1. Cash markets are also known as b. short selling
a. speculative markets c. risk neutral
b. spot markets d. traders
c. derivative markets e. none of the above
d. dollar markets 11. Which of the following statements is not true about
e. none of the above the law of one price?
2. A call option gives the holder a. investors prefer more wealth to less
a. the right to buy something b. investments that offer the same return in all
b. the right to sell something states must pay the risk-free rate
c. the obligation to buy something c. if two investment opportunities offer equivalent
d. the obligation to sell something outcomes, they must have the same price
e. none of the above d. investors are risk neutral
3. Which of the following instruments are contracts e. none of the above
but are not securities 12. The process of creating new financial products is
a. stocks sometimes referred to as
b. options a. financial frontiering
c. swaps b. financial engineering
d. a and b c. financial modeling
e. b and c d. financial innovation
4. A transaction in which an investor holds a position e. none of the above
in the spot market and sells a futures contract or 13. In which one of the following types of contract
writes a call is between a seller and a buyer does the seller agree
a. a gamble to sell a specified asset to the buyer today and then
b. a speculative position buy it back at a specified time in the future at an
c. a hedge agreed future price.
d. a risk-free transaction a. repurchase agreement
e. none of the above b. short selling
5. Which of the following are advantages of c. swap
derivatives? d. call
a. lower transaction costs than securities and e. none of the above
commodities 14. The expected return minus the risk-free rate is
b. reveal information about expected prices called
and volatility a. the risk premium
c. help control risk b. the percentage return
d. make spot prices stay closer to their true c. the asset’s beta
values d. the return premium
e. all of the above e. none of the above
6. A forward contract has which of the following 15. When the law of one price is violated in that the
characteristics? same good is selling for two different prices, an
a. has a buyer and a seller opportunity for what type of transaction is created?
b. trades on an organized exchange a. return-to-equilibrium transaction
c. has a daily settlement b. risk-assuming transaction
d. gives the right but not the obligation to buy c. speculative transaction
e. all of the above d. arbitrage transaction
7. A market in which the price equals the true e. none of the above
economic value
a. is risk-free STRUCTURE OF OPTIONS MARKETS
b. has high expected returns 1. A call option priced at $2 with a stock price of $30 and
c. is organized an exercise price of $35 allows the holder to buy the
d. is efficient stock at
e. all of the above a. $2
8. Which of the following trade on organized b. $32
exchanges? c. $33
a. caps d. $35
b. forwards e. none of the above
c. options 2. A put option in which the stock price is $60 and the
d. swaps exercise price is $65 is said to be
e. none of the above a. in-the-money
9. Which of the following markets is/are said to b. out-of-the-money
provide price discovery? c. at-the-money
a. futures d. exercisable
b. forwards e. none of the above
c. options 3. Organized options markets are different from over-
d. a and b the-counter options markets for all of the following
reasons except
 a. exercise terms c. warrants
b. physical trading floor d. mutual funds
c. regulation e. none of the above
d. standardized contracts 13. Which of the following index options is the most
e. credit risk widely traded?
4. The number of options acquired when one contract is a. S&P 500
purchased on an exchange is b. Nikkei 225
a. 1 c. Technology Index
b. 5 d. New York Stock Exchange Index
c. 100 e. none of the above
d. 500 14. In which city did organized option markets originate?
e. 8,000 a. New York
5. The advantages of the over-the-counter options b. Chicago
market include all of the following except c. Philadelphia
a. customized contracts d. San Francisco
b. privately executed e. none of the above
c. freedom from government regulation 15. An order that specifies a maximum price to pay if
d. lower prices buying is a
e. none of the above a. stop order
6. Which one of the following is not a type of transaction b. market order
cost in options trading? c. limit order
a. the bid-ask spread d. all or none order
b. the commission e. none of the above
c. clearing fees 16. What amount must a call writer pay if a cash–settled
d. the cost of obtaining a quote index call is exercised?
e. all of the above a. difference between the index level and the
7. If the market maker will buy at 4 and sell at 4.50, the exercise price
bid-ask spread is b. exercise price
a. 8.50 c. difference between the exercise price and
b. 4.25 the index level
c. 0.50 d. index level
d. 4.00 e. none of the above
e. none of the above 17. Option traders incur which of the following types of
8. An investor who owns a call option can close out the costs?
position by any of the following types of transactions a. margin requirements
except b. taxes
a. exercise c. stock trading commissions
b. offset d. a and b
c. expiring out-of-the-money e. a, b and c
d. buying a put 18. The total number of long option contracts outstanding
e. none of the above at any given time is called the
9. Which type of trader legitimately practices dual a. market cap
trading? b. sum options outstanding (SOO)
a. floor brokers c. option wealth outstanding (OWO)
b. off–floor option traders d. open interest
c. board brokers e. none of the above
d. designated primary market makers 19. What intermediary guarantees an option writer’s
e. none of the above performance?
10. The option price is also referred to as the a. credit worthiness rating company
a. strike b. brokerage
b. spread c. good-till-canceled order
c. premium d. clearinghouse
d. fee e. none of the above
e. none of the above 20. Suppose you hold a call option. The stock price has
11. An investor who exercises a call option on an index recently been increasing-making your call option
must more valuable. Through what process might you take
a. accept the cash difference between the advantage of the liquid nature of the options market?
index and the exercise price a. offsetting order
b. purchase all of the stocks in the index in b. contract reconciliation
their appropriate proportions from the c. mark to market order
writer d. settling up
c. immediately buy a put option to offset the e. none of the above
call option
d. immediately write another call option to
offset
e. none of the above
12. All of the following are forms of options except
a. convertible bonds
b. callable bonds