Q&A Hero

Q: Agricultural futures contracts are actively traded on A. milk. B. orange juice. C. lumber. D. milk and orange juice. E. All of the options are correct.

Q: Agricultural futures contracts are actively traded on A. soybeans. B. oats. C. wheat. D. soybeans and oats. E. All of the options are correct.

Q: Agricultural futures contracts are actively traded on A. corn. B. oats. C. pork bellies. D. corn and oats. E. All of the options are correct.

Q: Financial futures contracts are actively traded on which of the following indices? A. The S&P 500 Index B. The New York Stock Exchange Index C. The Nikkei Index D. The Dow Jones Industrial Index E. All of the options are correct.

Q: Financial futures contracts are actively traded on the following indices except A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All are actively traded.

Q: Which of the following statements is false? I) The maintenance-margin is the amount of money you post with your broker when you buy or sell a futures contract. II) If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. III) A margin deposit can only be met with cash. IV) All futures contracts require the same margin deposit. A. I only B. II only C. III only D. IV only E. I, III, and IV

Q: Which one of the following statements is true? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. The maintenance margin is set by the producer of the underlying asset.

Q: You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must A. buy one May corn futures contract. B. buy two April corn futures contract. C. sell one April corn futures contract. D. sell one May corn futures contract.

Q: Which of the following statements regarding delivery is false? I) Most futures contracts result in actual delivery. II) Only 1% to 3% of futures contracts result in actual delivery. III) Only 15% of futures contracts result in actual delivery. A. I only B. II only C. III only D. I and II E. I and III

Q: Which one of the following statements regarding delivery is true? A. Most futures contracts result in actual delivery. B. Only 1% to 3% of futures contracts result in actual delivery. C. Only 15% of futures contracts result in actual delivery. D. Approximately 50% of futures contracts result in actual delivery. E. Futures contracts never result in actual delivery.

Q: The open interest on silver futures at a particular time is the A. number of silver futures contracts traded during the day. B. number of outstanding silver futures contracts for delivery within the next month. C. number of silver futures contracts traded the previous day. D. number of all long or short silver futures contracts outstanding.

Q: A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. A. long; decrease B. short; decrease C. short; stay the same D. short; increase E. long; stay the same

Q: A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. A. long; increase B. long; decrease C. short; increase D. long; stay the same E. short; stay the same

Q: The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are A. specified by the buyers and sellers. B. specified only by the buyers. C. specified by the futures exchanges. D. specified by brokers and dealers. E. None of the options are correct.

Q: Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity. A. make delivery; take delivery B. take delivery; make delivery C. take delivery; take delivery D. make delivery; make delivery E. negotiate the price; pay the price

Q: The buyer of a futures contract is said to have a __________ position, and the seller of a futures contract is said to have a __________ position in futures. A. long; short B. long; long C. short; short D. short; long E. margined; long

Q: In a futures contract, the futures price is A. determined by the buyer and the seller when the delivery of the commodity takes place. B. determined by the futures exchange. C. determined by the buyer and the seller when they initiate the contract. D. determined independently by the provider of the underlying asset. E. None of the options are correct.

Q: Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange. A. are not; are B. are; are C. are not; are not D. are; are not E. are; may or may not be

Q: The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A. are; are B. are not; are C. are; are not D. are not; are not E. are; may or may not be

Q: A futures contract A. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C. gives the buyer the right, but not the obligation, to buy an asset sometime in the future. D. is a contract to be signed in the future by the buyer and the seller of the commodity. E. None of the options are correct.

Q: Vega is defined as A. the change in the value of an option for a dollar change in the price of the underlying asset. B. the change in the value of the underlying asset for a dollar change in the call price. C. the percentage change in the value of an option for a 1% change in the value of the underlying asset. D. the change in the volatility of the underlying stock price. E. the sensitivity of an option's price to changes in volatility.

Q: The intrinsic value of an out-of-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price.

Q: An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that A. the call price would increase. B. the call price would decrease. C. the call price would not change. D. the put price would decrease. E. the put price would not change.

Q: An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call? A. $8 B. $12 C. $6 D. $4 E. Cannot be determined without more information

Q: An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the intrinsic value of the call? A. $12 B. $10 C. $8 D. $23

Q: The intrinsic value of an at-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. None of the options are correct.

Q: The hedge ratio of an option is also called the option's A. alpha. B. beta. C. sigma. D. delta. E. rho.

Q: The intrinsic value of an in-the-money put option is equal to A. the stock price minus the exercise price. B. the put premium. C. zero. D. the exercise price minus the stock price. E. None of the options are correct.

Q: The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the option. IV) there will be no sudden extreme jumps in stock prices. A. I and II B. I and III C. II and II D. I, II, and IV E. I, II, III, and IV

Q: The intrinsic value of an in-of-the-money call option is equal to A. the call premium. B. zero. C. the stock price minus the exercise price. D. the striking price. E. None of the options are correct.

Q: As the underlying stock's price increased, the call option valuation function's slope approaches A. zero. B. one. C. two times the value of the stock. D. one-half the value of the stock. E. infinity.

Q: The intrinsic value of an at-the-money call option is equal to A. the call premium. B. zero. C. the stock price plus the exercise price. D. the striking price. E. None of the options are correct.

Q: The time value of a put option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept. A. I B. I and II C. II and III D. II E. I and IV

Q: The time value of a call option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept. A. I B. I and II C. II and III D. II E. I and IV

Q: Rubinstein (1994) observed that the performance of the Black-Scholes model had deteriorated in recent years, and he attributed this to A. investor fears of another market crash. B. higher-than-normal dividend payouts. C. early exercise of American call options. D. decreases in transaction costs. E. None of the options are correct.

Q: In volatile markets, dynamic hedging may be difficult to implement because A. prices move too quickly for effective rebalancing. B. as volatility increases, historical deltas are too low. C. price quotes may be delayed so that correct hedge ratios cannot be computed. D. volatile markets may cause trading halts. E. All of the options are correct.

Q: Since deltas change as stock values change, portfolio hedge ratios must be constantly updated in active markets. This process is referred to as A. portfolio insurance. B. rebalancing. C. option elasticity. D. gamma hedging. E. dynamic hedging.

Q: The intrinsic value of an out-of-the-money call option is equal to A. the call premium. B. zero. C. the stock price minus the exercise price. D. the striking price.

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that A. the call price would increase. B. the call price would decrease. C. the call price would not change. D. the put price would decrease. E. the put price would not change.

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the option has delta of .5, what is its elasticity? A. 4.17 B. 2.32 C. 1.79 D. 0.5 E. 1.5

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call? A. $8 B. $12 C. $0 D. $4 E. Cannot be determined without more information

Q: An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call? A. $12 B. $8 C. $0 D. $23

Q: Options sellers who are delta-hedging would most likely A. sell when markets are falling. B. buy when markets are rising. C. sell when markets are falling and buy when markets are rising. D. sell whether markets are falling or rising. E. buy whether markets are falling or rising.

Q: Empirical tests of the Black-Scholes option pricing model A. show that the model generates values fairly close to the prices at which options trade. B. show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls. C. indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks. E. All of the options are correct.

Q: Use the two-state put-option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____, and the hedge ratio is _______. A. $0 and $40; −4/7 B. $0 and $50; +4/7 C. $0 and $40; +4/7 D. $0 and $50; −4/7 E. $20 and $40; +1/2

Q: Relative to European puts, otherwise identical American put options A. are less valuable. B. are more valuable. C. are equal in value. D. will always be exercised earlier. E. None of the options are correct.

Q: An American call-option buyer on a nondividend-paying stock will A. always exercise the call as soon as it is in the money. B. only exercise the call when the stock price exceeds the previous high. C. never exercise the call early. D. buy an offsetting put whenever the stock price drops below the strike price. E. None of the options are correct.

Q: Which one of the following variables influences the value of put options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility A. I and IV only B. II and III only C. I, II, and IV only D. I, II, III, and IV E. I, II, and III only

Q: Which one of the following variables influences the value of call options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility A. I and IV only B. II and III only C. I, II, and IV only D. I, II, III, and IV E. I, II, and III only

Q: A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar. A. increase; more than B. decrease; more than C. decrease; less than D. increase; less than E. increase; exactly

Q: Lower dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to higher dividend-payout policies. A. negative; negative B. positive; positive C. positive; negative D. negative; positive E. zero; zero

Q: Higher dividend-payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend-payout policies. A. negative; negative B. positive; positive C. positive; negative D. negative; positive E. zero; zero

Q: A put option on the S&P 500 Index will best protect a portfolio A. of 100 shares of IBM stock. B. of 50 bonds. C. that corresponds to the S&P 500. D. of 50 shares of AT&T and 50 shares of Xerox stocks. E. that replicates the Dow.

Q: A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is 0.30, and the stock is currently selling for $46, what is the elasticity of the put? A. 2.76 B. 2.30 C. −7.67 D. −2.76 E. −2.30

Q: If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the same expiration date and exercise price as the call would be A. 0.70. B. 0.30. C. −0.70. D. −0.30. E. −0.17.

Q: If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be A. 0.60. B. 0.40. C. −0.60. D. −0.40. E. −0.17.

Q: If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be A. 0.30. B. 0.50. C. −0.60. D. −0.50. E. −0.17.

Q: If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be A. 0.70. B. 0.30. C. −0.70. D. −0.30. E. −0.17.

Q: A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. +$700 B. +$500 C. −$580 D. −$520

Q: A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. −$345 B. +$500 C. −$580 D. −$520

Q: A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. +$700 B. −$850 C. −$580 D. −$520

Q: A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. +$700 B. +$500 C. −$1,150 D. −$520

Q: Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases, and portfolio B if it decreases E. Portfolio B if the stock price increases, and portfolio A if it decreases

Q: Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B consists of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases and portfolio B if it decreases E. Portfolio B if the stock price increases and portfolio A if it decreases

Q: Volatility risk is A. the volatility level for the stock that the option price implies. B. the risk incurred from unpredictable changes in volatility. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: Dynamic hedging is A. the volatility level for the stock that the option price implies. B. the continued updating of the hedge ratio as time passes. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: Delta neutral A. is the volatility level for the stock that the option price implies. B. is the continued updating of the hedge ratio as time passes. C. is the percentage change in the stock call-option price divided by the percentage change in the stock price. D. means the portfolio has no tendency to change value as the underlying portfolio value changes.

Q: The gamma of an option is A. the volatility level for the stock that the option price implies. B. the continued updating of the hedge ratio as time passes. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: The elasticity of a stock put option is always A. positive. B. smaller than one. C. negative. D. infinite.

Q: The elasticity of a stock call option is always A. greater than one. B. smaller than one. C. negative. D. infinite. E. None of the options are correct.

Q: The elasticity of an option is A. the volatility level for the stock that the option price implies. B. the continued updating of the hedge ratio as time passes. C. the percentage change in the stock call-option price divided by the percentage change in the stock price. D. the sensitivity of the delta to the stock price.

Q: The percentage change in the stock call-option price divided by the percentage change in the stock price is called A. the elasticity of the option. B. the delta of the option. C. the theta of the option. D. the gamma of the option.

Q: The dollar change in the value of a stock call option is always A. lower than the dollar change in the value of the stock. B. higher than the dollar change in the value of the stock. C. negatively correlated with the change in the value of the stock. D. higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock. E. lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

Q: A hedge ratio for a put is always A. equal to one. B. greater than one. C. between zero and one. D. between negative one and zero. E. of no restricted value.

Q: A hedge ratio for a call is always A. equal to one. B. greater than one. C. between zero and one. D. between negative one and zero. E. of no restricted value.

Q: A hedge ratio for a call option is ________, and a hedge ratio for a put option is ______. A. negative; positive B. negative; negative C. positive; negative D. positive; positive E. zero; zero

Q: A hedge ratio of 0.85 implies that a hedged portfolio should consist of A. long 0.85 calls for each short stock. B. short 0.85 calls for each long stock. C. long 0.85 shares for each short call. D. long 0.85 shares for each long call. E. None of the options are correct.

Q: A hedge ratio of 0.70 implies that a hedged portfolio should consist of A. long 0.70 calls for each short stock. B. short 0.70 calls for each long stock. C. long 0.70 shares for each short call. D. long 0.70 shares for each long call. E. None of the options are correct.