Q&A Hero

Q: As in the stock and bond markets, interest is paid on a margined commodity contract.

Q: If a financial manager wishes to protect against an interest rate drop, he can go long in the futures market.

Q: Commodity trading is based on the use of margin rather than actual cash dollars.

Q: If a corporate treasurer wants to hedge against interest rate increases on a new bond issue to be floated, he can sell short in the futures market.

Q: The commodity exchanges are primarily regulated by the Federal Reserve.

Q: Treasury bond futures trade on the New York Stock Exchange.

Q: Speculators are not significant participants in the commodities markets.

Q: Treasury bonds are quoted in percent of par, taken to a 32nd of a percentage point.

Q: Hedging is the basic reason for the existence of the commodity exchanges.

Q: Prices in the cash market are somewhat dependent on prices in the futures market.

Q: The daily trading limits do not affect the efficiency of the market much because the commodity exchanges place very broad limitations on maximum daily price movements.

Q: A hedger reduces risk of loss and enhances additional profit opportunities.

Q: Margin maintenance requirements usually run 5-10% of the initial margin.

Q: For a hedge to work, the futures contract must continue until actual delivery takes place.

Q: Commodity exchanges do not limit maximum daily price movements.

Q: To close a position, the seller/buyer of a contract would buy/sell a similar contract.

Q: Most commodity futures contracts are closed out before the actual transaction is to take place.

Q: A requirement of a futures contract is that the buyer takes possession on a given date.

Q: The futures markets were originally set up to allow livestock producers to speculate in their positions in a given commodity.

Q: The use of financial futures will most likely increase as financial managers gain a greater understanding and appreciation of their uses.

Q: A stock is selling for $35. You buy an April 30 call option for 3.75 and short (write) an April 30 call option for 1.25. You have entered into a vertical spread. If the stock is $43 at expiration, what will be your profit or loss on the spread?

Q: Calculate the leverage from holding a call option with a closing price of $3 on February 18 and a closing price of $6.5 on April 6. The stock price on February 18 was $22 and closed at $27 on April 6.

Q: Cross-hedging refers to the practice of using one form of security to reduce risk on another form of security.

Q: Assume that a stock is selling for $47 with options available at 20, 30, and 40 strike prices. The 40 call option is at 7 1/2. Calculate the following: (a) The intrinsic value of the $40 call (b) Is the call in-the-money? (c) The speculative premium on the 40 call option (d) The percent the speculative premium represents of the common stock price

Q: Corporate financial managers use interest rate futures to reduce the risk of loss from a change in interest rates.

Q: Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of $75 and a premium of $6. If at the time of expiration, the stock is selling at the following prices ($75, $80, $90) what will be your overall gain or loss?At $75, loss is $400.At $80 loss is $600.At $90 gain is $1,100.

Q: Trading in financial futures is similar to trading in commodities except for considerably higher margin requirements for financial futures.

Q: Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100 share call option on his holdings. The option has a $65 strike price and a premium of $8.75. If the stock is selling at $64 at the time of expiration, what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)A. $975.00B. $875.00C. $775.00D. $100.00E. $87.50

Q: Because of price movement limitations, the commodities market is not always in equilibrium.

Q: A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50. What is the speculative premium of the put? A. $4.25 B. $1.25 C. $3.25 D. $5.25 E. $7.50

Q: The margin requirement on commodities futures is generally the same as or lower than financial futures.

Q: The commodities exchanges are regulated primarily by the SEC.

Q: A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50. What percentage of the common stock price does the speculative premium represent? A. 16.39% B. 14.375% C. 12.57% D. 4.38% E. 3.83%

Q: Commodities can usually be purchased with a very small margin requirement.

Q: IBM was trading at $100 when Mrs. Peterson bought a 100 call on IBM at a price of $10. Three months later, IBM common stock was trading at $130, and the call option was trading at $33. The leverage factor for this situation would be: A. 11x. B. 3.3x. C. 7.66x. D. 25.38x.

Q: An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _________ strategy to invest in options. A. hedging B. leverage C. guaranteed price D. None of the above

Q: A major disadvantage of using call options to hedge a short position is that: A. hedging increases the risk of loss on the short sale. B. the option premium and commission reduce profit potential. C. the price of the stock may go up. D. None of the above

Q: An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22. A. The intrinsic value is $3 and the speculative premium is 0 B. The intrinsic value is $3 and the speculative premium is $3 C. The time to expiration must be very close D. A and C

Q: Block Corp. 40 call option is selling for $6, and the common stock is selling for $41. The intrinsic value is: A. $6, and the speculative premium is $1. B. $1, and the speculative premium is $5. C. $1, and the speculative premium is $7. D. $5, and the speculative premium is $7.

Q: All of the following are advantages of buying call options instead of stock EXCEPT: A. options represent an opportunity to control shares of stock without making a large dollar commitment. B. commissions on stock trading are greater than those on options trading. C. options can be quite conservative and used to reduce risk. D. All of the above are advantages

Q: The leverage strategy of buying call options is based on the idea that: A. a small change in the price of the underlying common stock can cause a large change in the price of the option. B. leverage reduces the risk of loss on the option contract. C. leverage reduces the risk of loss on the portfolio. D. None of the above

Q: An investor striving for maximum leverage will generally buy options that are: A. in-the-money, or slightly out-of-the-money. B. out-of-the-money, or slightly in-the-money. C. deep in-the-money. D. at-the-money.

Q: In general, the speculative premiums (in percent) are higher for: A. high-beta, low-dividend yield stocks. B. low-beta, high-dividend yield stocks. C. high-beta, high-dividend yield stocks. D. low-beta, low-dividend yield stocks.

Q: At the time of expiration, the premium (price) on a call option: A. reflects risk in addition to intrinsic value. B. will be equal to the intrinsic value. C. may be above or below the intrinsic value. D. None of the above

Q: All of the following are characteristics of LEAPS except: A. LEAPS have up to two years to expiration. B. LEAPS have generally been limited to blue-chip stocks, such as Coca-Cola, Dow Chemical, General Electric, IBM, and others. C. LEAPS have the same characteristics as the short-term options, in general. D. LEAPS generally have lower premiums because of their length.

Q: _________ is a factor which causes the speculative premium to increase. A. Volatility of the underlying stock as measured by beta B. Low dividend yield C. A long exercise period D. All of the above

Q: The difference between a put and a call option is that: A. a put is an option to sell common stock at a specified price while a call is an option to buy common stock at a specified price. B. a call is an option to sell common stock at a specified price while a put is an option to buy common stock at a specified price. C. a call is an option to buy common stock at a specified price while a put is the option to buy preferred stock at a specified price. D. a call is an option to sell common stock at a specified price while a put is the option to sell preferred stock at a specified price.

Q: A put is said to be "in-the-money" when the strike price is __________ the market price. A. equal to B. greater than C. less than D. may be more than one of the above, depending on the option premium

Q: A straddle is a combination of a put and call on: A. the same stock, with the same strike price and expiration date. B. different stocks, with the same strike price and expiration date. C. different stocks, with different strike price and expirations dates. D. the same stock, with the same the strike price and different expiration dates.

Q: A call is said to be "in-the-money" when the strike price is __________ the market price. A. equal to B. greater than C. less than D. may be more than one of the above, depending on the option premium

Q: Unlike a covered call writer, a naked call writer will always lose if:A. the stock price rises above the strike price, plus the speculative premium.B. the stock price declines.C. a closing transaction is executed.D. None of the above

Q: Beltran Industries' common stock trades at $42 per share. The 40 call option trades at $4. This option would be: A. in-the-money by $2. B. in-the-money by $4. C. out-of-the money by $2. D. out-of-the-money by $4.

Q: Under what circumstances can the writer of a call option expect to profit? A. Stock price declines B. Stock price remains the same C. The increase in stock price is less than the speculative premium D. All of the above

Q: LEAPS: A. are long-term equity anticipation securities. B. have higher speculative premiums than regular options. C. are limited to a maximum of 2 years to expiration. D. All of the above are true

Q: Expiration dates in the option market: A. were expanded by the introduction of LEAPS. B. are variable depending on the company. C. are limited to a maximum of 9 months. D. occur every month on a 12-month calendar basis for each equity option traded.

Q: Standardized strike prices and expiration dates in the option market: A. allows for more efficient trading strategies. B. lowers the time premiums. C. allows hedgers, speculators, and arbitrageurs to all operate together. D. A and C

Q: The intrinsic value of a put option is equal to the strike price minus the market price of the option.

Q: The _____, which functions as the issuer of all options listed on the exchanges, is responsible for the liquidity and ease of operation of the options market. A. Chicago Board Options Exchange B. Options Clearing Corporation C. New York Stock Exchange D. None of the above

Q: The intrinsic value of a call option equals the market price minus the strike price of the option.

Q: A call can be used to cover a long position against the risk of rising stock prices.

Q: Which of the following is NOT an advantage of listed options markets over the previous method of over-the-counter trading? A. Direct contact between buyers and sellers of options B. Standardized contract periods and exercise price C. More certainty and more efficient trading strategies D. All of the above are advantages

Q: _______ was the first organized exchange to trade options, in 1973. A. The New York Stock Exchange B. The American Exchange C. The Chicago Board Option Exchange D. The International Securities Exchange E. None of the above

Q: The total premium for an option consists of an intrinsic value plus a speculative premium, which declines to zero by the expiration date.

Q: Investors can buy put and call options on stock indexes, such as the Dow Jones Industrial Average and the Standard & Poor's 500.

Q: The International Securities Exchange: A. is an electronic communication network dealing in options. B. has taken significant market share from the Chicago Board Options Exchange. C. started trading options in 2000. D. All of the above are true

Q: Which of the following is NOT a characteristic of put and call options? A. They are contracts to buy or sell 100 shares of common stock B. There is always a specified price C. There is always a specified time period to exercise options D. All of the above are characteristics

Q: Much of the liquidity and ease of operation of the option exchanges is due to the role of the Options Clearing Corporation.

Q: An option can be defined as the right, acquired for a consideration, to buy or sell something at a fixed price within a specified period of time.

Q: Dividends on the underlying common stock will affect the option price.

Q: The difference between selling short and buying a put is that the short seller can lose more than the initial investment.

Q: If you buy one option and write one option at a different strike price on the same underlying stock, you are creating a "spread."

Q: The longer the time to expiration, the higher the speculative premium per day.

Q: A straddle is a combination of a put and call on the same stock with the same strike price and expiration date.

Q: The total premium (option price) is a combination of a time premium and a speculative premium.

Q: LEAPS have a maximum time to expiration of 5 years.

Q: A put writer exposes himself to the risk of declining stock prices.

Q: The writer of a put agrees to sell stock at the strike price.

Q: All option contracts are adjusted for stock splits, stock dividends, or other distributions.

Q: A put is purchased for $5 with a $22 strike price. If the stock ends up at $25, the purchaser breaks even.

Q: If an option is traded on more than one exchange, it may be bought, sold, or closed out on any exchange.