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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Options and Other Derivatives: Introduction

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	An American put option allows the holder to
		A)	a. potentially benefit from a stock price decrease with less risk than short selling the stock.
		B)	b. sell the underlying asset at the striking price on or before the expiration date.
		C)	c. buy the underlying asset at the striking price on or before the expiration date.
		D)	b and c.
		E)	a and b.


2	A European call option can be exercised
		A)	only on the expiration date.
		B)	any time in the future.
		C)	if the price of the underlying asset declines below the exercise price.
		D)	immediately after dividends are paid.
		E)	none of the above.


3	The maximum loss a buyer of a stock call option can suffer is equal to
		A)	the striking price minus the stock price.
		B)	the stock price minus the value of the call.
		C)	the stock price..
		D)	the call premium
		E)	none of the above.


4	The intrinsic value of an out-of-the-money call option is equal to
		A)	the call premium.
		B)	the stock price minus the exercise price.
		C)	Zero
		D)	the striking price.
		E)	none of the above.


5	The maximum loss the writer of a stock put option can suffer is equal to
		A)	the striking price minus the put premium.
		B)	the striking price.
		C)	the stock price minus the put premium.
		D)	the put premium.
		E)	none of the above.


6	According to the put-call parity theorem, the value of a European put on a non-dividend paying stock is equal to:
		A)	the call value plus the present value of the exercise price plus the stock price.
		B)	the present value of the stock price minus the exercise price minus the call price.
		C)	the call value plus the present value of the exercise price minus the stock price.
		D)	the present value of the stock price plus the exercise price minus the call price.
		E)	none of the above.


7	Warrants are essentially
		A)	put options issued by the firm.
		B)	call options issued by the firm.
		C)	stocks issued by the firm
		D)	dividends issued by the firm
		E)	none of the above.


8	The purchase of a share of stock with a simultaneous sale of a call on the share of stock is known as a
		A)	butterfly spread
		B)	collar
		C)	covered call
		D)	straddle
		E)	none of the above.


9	The put-call parity theorem
		A)	allows for arbitrage opportunities if violated.
		B)	represents the proper relationship between put and call prices.
		C)	may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.
		D)	all of the above.
		E)	none of the above.


10	A callable bond should be priced the same as
		A)	a convertible bond.
		B)	a straight bond plus a call option.
		C)	a straight bond plus a put option.
		D)	a straight bond plus warrants.
		E)	a straight bond.

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