Options Tutorial

1. Chris Dunkins bought a put option with a strike of $59. If at expiration the stock is
now worth $42, then what is the payo of the option at expiration?

A. $0 payo

B. $17 positive payo

C. $17 negative payo

2. The implied volatility on S&P 500 options has decreased over the past month. An
analyst would most likely conclude that:

A. the value of the broad market has decreased.

B. the level of market uncertainty has decreased.

C. interest rates have decreased.

3. Exchange-traded derivatives are:

A. standardized but not backed by a clearinghouse.

B. backed but not standardized by a clearinghouse.

C. standardized and backed by a clearinghouse.

4. Which of the following best describes a forward commitment?

A. A legally binding promise to perform some action in the future.

B. A claim (to a payo ) that depends on a particular event.

C. A contingent claim that depends on a stock price at some future date.

5. Which of the following best describes an option contract?

A. A legally binding promise to perform some action in the future.

B. A contingent claim that depends on a stock price at some future date.

C. A legal agreement to buy or sell a financial instrument at a predetermined price at a
specified time.

6. A futures contract can be categorized as:

A. a forward commitment.

B. a contingent claim.

C. both A) and B).

7. The party to a forward contract who agrees to buy the financial or physical asset
has a:

A. long forward position.

B. long call position.

C. short forward position.

8. Which of the following is least likely an exchange-traded derivative instrument?

A. Futures contract

B. Forward contract

C. Option contract

9. Which of the following derivative contracts may expose the owner of the contract
to default risk?

A. Swap contract

B. Option contract

C. Futures contract

10. In order to protect themselves from the downside risk of stock prices, investors
should most likely:

A. buy put options.

B. sell put options.

C. buy call options

11. Arbitrage profit is the risk-free profit that is earned when two securities with
di erent prices have:

A. low market liquidity.

B. identical term structures.

C. identical cash flows.

12. ZE Bank enters into a plain vanilla swap contract with Lux Financiers with the
intent of receiving floating-rate payments. In these circumstances, ZE Bank takes
the:

A. Pay-fixed side.

B. Pay-floating side.

C. Short position.

13. A U.S. based company has a subsidiary in Germany from which it expects to
receive €8 million in the next 3 months. If the company's management is concerned
about foreign currency, it will most likely enter into a:

A. currency forward contract by taking a short position in the €.

B. forward rate agreement (FRA) by taking a long position in the €.

C. currency forward contract by taking a short position in the €.

14. In contrast to OTC-traded derivatives, exchange-traded derivatives most likely:

A. have higher liquidity.

B. operate at a higher degree of regulation.

C. have higher liquidity and operate at a higher degree of regulation.

15. Which of the following best describes a covered call strategy?

A. Owning the underlying asset and selling a call option on it.

B. Selling the underlying asset and buying a call option.

C. Buying a call and a put on the same underlying asset.

16. What is the main benefit of a protective put?

A. Generating income from option premiums.

B. Limiting downside risk while retaining upside potential.

C. Profiting from both upward and downward movements.

17. In a bull spread created with call options, the maximum profit is:

A. Unlimited if the asset price rises sharply.

B. The di erence between strike prices minus net premium paid.

C. Equal to the premium received for the short call.

18. Which statement best describes a bear spread?

A. Profits from a moderate decrease in the underlying asset price.

B. Profits from a moderate increase in the underlying asset price.

C. Unlimited profit potential if the price drops sharply.

19. A butterfly spread is most profitable when:

A. Volatility increases significantly.

B. The underlying price stays near the middle strike price.

C. The price moves far away from the middle strike price.

20. The primary purpose of a collar strategy is to:

A. Generate unlimited upside while eliminating downside.

B. Limit both downside losses and upside gains.

C. Profit from high volatility without owning the asset.

21. In a long straddle, for a profit to occur:

A. The price must stay near the strike price until expiration.
B. The asset price must move more than the total premium paid in either direction.

C. The asset price must decrease significantly.

22. A box spread, when priced correctly, will:

A. Provide unlimited gains if volatility is high.

B. Earn a return equal to the market risk premium.

C. Earn the risk-free rate regardless of stock price changes.

23. Which tool is best for limiting the maximum borrowing rate in a floating-rate loan?

A. Interest rate floor.

B. Interest rate cap.

C. Interest rate collar.

24. Delta hedging primarily aims to:

A. Reduce sensitivity to changes in volatility.

B. Neutralize small price movements in the underlying asset.

C. Lock in a fixed profit regardless of market movement.

25. Consider a call option selling for $5 in which the exercise price is $50 and the
price of the underlying is $48. If the price of the underlying at expiration is $53, the
value at expiration and the profit to the buyer is:

A. $2 and $3 respectively.

B. $3 and -$2 respectively.

C. $3 and $2 respectively.

26. Analyst 1: The maximum profit from buying a call is infinite and the maximum
loss is the option premium.

Analyst 2: The maximum profit from buying a put is infinite and the maximum loss is
the option premium.
Which analyst’s statement is most likely correct?

A. Analyst 1.

B. Analyst 2.

C. Both.

The following information relates to questions 27-29:

A call option with an exercise price of $90 is selling for $6. The price of the underlying
is $87.

27. The value at expiration for the buyer when the underlying is priced at $92 is most
likely to be:

A. $2.

B. $3.

C. $5.

28. The profit at expiration for the buyer when the underlying is priced at $94 is most
likely to be:

A. - $2.

B. $0.

C. $2.

29. The value at expiration for the seller when the underlying is priced at $93 is most
likely to be:

A. -$3.

B. $0.

C. $3.

30. Consider a call option selling for $5 in which the exercise price is $50 and the
price of the underlying is $48. If the price of the underlying at expiration is $47, the
value at expiration and the profit to the buyer is:
A. $0 and -$5 respectively.

B. $3 and $2 respectively.

C. $0 and -$8 respectively.

31. Consider a call option selling for $10 in which the exercise price is $100 and the
price of the underlying is $96. The maximum profit to the buyer and the maximum
profit to the seller is:

A. ∞ and $10 respectively.

B. $10 and ∞ respectively.

C. $96 and $4 respectively

32. Sam has £40,000 to invest; he believes that Apple’s stock price will appreciate by
£50 to £500 in three months. The three-month at-the-money put on one share of
Apple costs £2.5, while the three-month at-the-money call costs £1.75. In order to
profit from his view on Apple stock, he will most likely:

A. buy calls on shares of Apple.

B. sell calls on shares of Apple.

C. sell puts on shares of Apple.

33. You simultaneously purchase a stock selling at $57 and write a call option on it
with an exercise price of $65 selling at $7. This position is commonly called a:

A. fiduciary call.

B. covered call.

C. protective put.

34. An analyst has the following data and wishes to execute the covered call strategy
on an option:

Stock price at t = 0 is $82; strike price = $84; call premium = $3. Which of the following
is
most likely to be the breakeven for this position?

A. $79.

B. $81.

C. $87.

35. A put option with an exercise price of $100 is selling for $8. The price of the
underlying is $103. The maximum profit to the seller is most likely to be:

A. $8.

B. $100.

C. $108.