Chapter 4 Practice Questions
1. A covered call is the combination of a _____ call and a _____.
A. Long; short futures contract
B. Long; long put
C. Short; long futures contract
D. Short; short put
2. Which of the following is not true of an American-style option?
A. It can be traded at any time.
B. It can be exercised at any time.
C. It is characteristic of the options market.
D. It trades at lower prices than the European-style option.
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:
A. Close her position
B. Trade her position
C. Exercise her position
D. Liquidate her position
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?
A. It has risen by at least $5.
B. It has risen by exactly $5.
C. It has risen by as much as $5.
D. It is at least $5.
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?
A. $0.70
B. $4.30
C. $1.12
D. $3.62
6. The intrinsic value of an option is a measure of:
A. The price volatility of the underlying
B. The contract’s time to expiration
C. Prevailing economic conditions
D. The relation of the strike price to the commodity’s future market value
7. Options that expire in more than nine months must pay a margin of _____of the option’s premium.
A. 100%
B. 75%
C. 50%
D. 20%
8. For equity options, purchasers of calls and puts must deposit a margin on the underlying security’s market value of:
A. 50%
B. 20%
C.