Sec & Investments Chap 14&15

Which financial instrument grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time?

• Call option

• Put option

• Sale of a futures contract

• Purchase of a futures contract

A _____ requires a premium above and beyond the price to be paid for the financial instrument.

• futures contract

• call option

• put option

• B and C

A put option is "out of the money" when the

• market price of the security exceeds the exercise price.

• market price of the security equals the exercise price.

• market price of the security is less than the exercise price.

When the market price of the underlying security exceeds the exercise price, a call option is considered:

• a. in the money.

• b. put option is in the money.

• c. at the money.

• d. out of the money.

The _____ is the most important exchange for trading options.

• New York Stock Exchange (NYSE)

• Chicago Board Options Exchange (CBOE)

• London Stock Exchange (LSE)

• Nasdaq

The _____ the higher the call option premium, other things being equal.

• lower the existing price of the security relative to the exercise price

• lower the variability of the security's market price

• longer the maturity of the option

• A and B

The longer the time to maturity, the _____ the call option premium and the _____ the put option premium.

• higher; lower

• lower; higher

• higher; higher

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium.

• higher; lower

• lower; higher

• higher; higher

• lower; lower

The sale of a call option on a stock the seller already owns is referred to as what?

• a. a covered call.

• b. a naked call.

• c. call on futures.

• d. futures on options.

Covered call writing _____ the upside potential return and _____ the risk of an investment in stock.

• a. increases; increases

• b. increases; decreases

• c. limits; increases

• d. limits; decreases