Series 3: Chapter 4 Practice Questions

Chapter 4 Practice Questions

1. 1. A covered call is the combination of a _____ call and a _____.
2. A. Long; short futures contract
3. B. Long; long put
4. C. Short; long futures contract
5. D. Short; short put
6. 2. Which of the following is not true of an American option?
7. A. It can be traded at any time.
8. B. It can be exercised at any time.
9. C. It is characteristic of the options market.
10. D. It trades at lower prices than the European option.
11. 3. Carol opens a short call. Two months later, her position is well out of the money and she wishes to secure her profits. She can take any of the following actions except:
12. A. Close her position
13. B. Trade her position
14. C. Exercise her position
15. D. Liquidate her position
16. 4. You buy an out-of-the-money call option in the commodities market with a $30 strike price for which you pay $2.50. Three days later, the market price of that commodity has shot up to $35. What can you say about your premium?
17. A. It has risen by at least $5.
18. B. It has risen by exactly $5.
19. C. It has risen by as much as $5.
20. D. It is at least $5.
21. 5. You hold a put option, which you bought at the money for $2.50, on a commodity futures product. If the commodity’s market price falls from $35 to $31 and it has a delta of -0.45, what can you expect the cost of the option to become?
22. A. $0.70
23. B. $4.30
24. C. $1.12
25. D. $3.62
26. 6. The intrinsic value of an option is a measure of:
27. A. The price volatility of the underlying
28. B. The contract’s time to expiration
29. C. Prevailing economic conditions
30. D. The relation of the strike price to the commodity’s market value
31. 7. Options that expire in more than nine months must pay a margin of _____of the option’s premium.
32. A. 100%
33. B. 75%
34. C. 50%
35. D. 20%
36. 8. For equity options