BE332 - Class 6 - Options with Answers
Multiple Choice

1) Which of the following options will yield a profit to the purchaser?
a) An expired option that is "at the money."
b) A call option when the price of the underlying asset increases above the option's strike price by an amount greater than the premium paid for the option.
c) A put option when the price of the underlying increases above the option's strike price by an amount greater than the premium paid for the option.

2) Which statement is correct?
a) The seller of an option has limited liability and unlimited opportunity for gain.
b) The seller of an option has unlimited liability and unlimited opportunity for gain.
c) The seller of an option has unlimited liability and limited opportunity for gain.

3) If a call option is far 'out of the money' the value of the option will be
a) Greater than the value of a put option with the same exercise price
b) Equal to the value of a put option with the same exercise price
c) Zero
d) Less than the value of a put option with the same exercise price
e) None of the above is correct

4) A/An ______ gives the buyer the right, but not the obligation, to exercise the option at any time before the expiration or maturity date:
a) At-The-Money Option
b) American Option
c) Complex Option
d) Asian Option
e) European Option

5) Which one of the following transactions would be considered a protective strategy?
a) Sell a call against a stock you sold short
b) Sell a put on a stock you own
c) Buy a put on a stock you own
d) Buy a call on a stock you own
e) Sell a naked put

6) The price that the buyer of an option (call or put) pays to acquire the option is called the
a) strike price
b) exercise price
c) execution price
d) acquisition price
e) premium

7) The price that the buyer of a call option pays for the underlying asset if she executes her option is called the
a) strike price
b) exercise price
c) execution price
d) A or C
e) A or B

8) The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the
a) strike price
b) exercise price
c) execution price
d) A or B
e) A or C
9) The price that the buyer of a put option receives for the underlying asset if she executes her option is called the
a) strike price
b) exercise price
c) execution price
d) A or C
e) A or B

10) An American call option allows the buyer to
a) sell the underlying asset at the exercise price on or before the expiration date.
b) buy the underlying asset at the exercise price on or before the expiration date.
c) sell the option in the open market prior to expiration.
d) A and C
e) B and C

11) A European call option allows the buyer to
a) sell the underlying asset at the exercise price on the expiration date.
b) buy the underlying asset at the exercise price on or before the expiration date.
c) sell the option in the open market prior to expiration.
d) buy the underlying asset at the exercise price on the expiration date.
e) C and D

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

13) A European put option allows the holder to
a) buy the underlying asset at the strike price on or before the expiration date.
b) sell the underlying asset at the strike price on or before the expiration date.
c) potentially benefit from a stock price decrease with less risk than short selling the stock.
d) sell the underlying asset at the strike price on the expiration date.
e) C and D

14) The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call
a) is out of the money.
b) is in the money.
c) sells for a higher price than if the market price of AT&T stock is $40.
d) A and