Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months. Which of the following derivative contracts available to VFO’s chief investment officer is best suited to reduce exposure to a decline in Biomian’s stock price in the next six months?

A short futures position in Biomian stock that settles in six months

A short put position on Biomian stock that expires in six months

A long call position on Biomian stock that expires in six months

Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months. VFO’s market strategist believes that Biomian’s share price will rise over the next six months but would like to protect against a decline in Biomian’s share price over the period. Which of the following positions is best suited for VFO to manage its existing Biomian exposure based on this view?

A long put position on Biomian stock that expires in six months

A short call position on Biomian stock that expires in six months

A long futures position in Biomian stock that settles in six months

Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months. Assume that Biomian shares rise over the next six months. Which of the following statements about VFO’s derivative strategies under this scenario is most accurate?

We do not have enough information to determine whether a forward sale or the right to sell Biomian shares will be more profitable in six months

A forward sale of Biomian shares in six months would be more profitable than purchasing the right to sell Biomian shares in six months.

Purchasing the right to sell Biomian shares in six months would be more profitable than a forward sale of Biomian shares in six months.

At expiration, the exercise value of a call option is the

greater of zero or the underlying asset price minus the exercise price

underlying asset price minus the exercise price

greater of zero or the exercise price minus the underlying asset price.

The time value of an option is most accurately described as

equal to the entire premium for an out-of-the-money option

the amount by which the intrinsic value exceeds the option premium

increasing as the option approaches its expiration date

Which of the following statements about moneyness is most accurate? When the stock price is

above the strike price, a put option is out-of-the-money

below the strike price, a call option is in-the-money

above the strike price, a put option is in-the-money

An investor holds two options on the same underlying stock, a call option with an exercise price of 25 and a put option with an exercise price of 30. If the market price of the stock is 27

only one of the options is in the money

At expiration, exercise value is equal to time value for

an out-of-the-money call or an out-of-the-money put

an in-the-money call or an out-of-the-money put

an out-of-the-money call or an in-the-money put

An option's intrinsic value is equal to the amount the option is

in the money, and the time value is the market value minus the intrinsic value

in the money, and the time value is the intrinsic value minus the market value

out of the money, and the time value is the market value minus the intrinsic value

An investor calculates that the premium of a European put option is less than its value based on put-call parity. In exploiting this arbitrage opportunity, the investor is most likely to:

invest the present value of the exercise price at the risk-free rate.

A fiduciary call is a portfolio that is made up of:

a call option and a bond that pays the exercise price of the call at option expiration.

a call option and a share of stock.

a call that is synthetically created from other instruments.

Which of the following portfolios has the same future cash flows as a protective put?

Long call option, long risk-free bond.

Long call option, long risk-free bond, short the underlying asset.

Short call option, long risk-free bond.

The relationship referred to as put-call-forward parity states that at time = 0, if there is no arbitrage opportunity, the value of a call at X on an asset that has no holding costs or benefits plus the present value of X is equal to:

the value of a put option at X plus the present value of the forward contract price.

the asset price minus the value of a put option at X.

the forward contract price plus the value of a put option at X.

In order to value an option with a one-period binomial model, three things an analyst would need to know are:

the risk-free rate, the volatility of the price of the underlying, and the current asset price.

the risk-adjusted discount rate, the volatility of the price of the underlying asset, and option exercise price.

the probability of an up-move, the option exercise price, and the current asset price.

If a European put option is trading at a higher price than that implied from the binomial model, investors can earn a return in excess of the risk-free rate by:

selling the underlying, buying the call, and investing at the risk-free rate.

buying the underlying, selling the call, and investing at the risk-free rate.

buying the underlying, buying the call, and borrowing at the risk-free rate.

We can use the risk-free rate to value an option with a one-period binomial model because:

combining options with the underlying asset in a specifc ratio will produce a risk-free future payment.

combining put and call options in specifc ratio can produce a risk-free future payment.

options investors are risk-neutral, on average.

One method of valuing a call option with a one-period binomial model involves:

finding a combination of the call option and the underlying that will have the same value regardless of the price of the underlying at expiration.

using the probabilities of an up-move and a down-move to get the expected value of the payment at expiration.

discounting the average call value at expiration by the risk-free rate.

An option's value is affected by:

expected probabilities of underlying price increases or decreases only.

actual probabilities of underlying price increases or decreases only.

both actual and expected probabilities of underlying price increases or decreases.

Which of the following statements best describes the effect on the no-arbitrage price of a call option on Drinsky Inc. (Drinsky) shares? A decrease in the risk-free rate will:

decrease Drinsky’s call option price.

increase Drinsky’s call option price.

have no eìect on Drinsky’s call option price.

Which of the following statements regarding risk-neutrality is most accurate?

Risk-neutral pricing can be applied to any model that uses future underlying asset price movements.

Risk-neutral pricing requires using expected return to price an option

Risk-neutral probabilities are determined by investor views on risk and the risk free rate.

CFA 1 Der Option

Authored by Hanh Nguyen

Financial Education

Professional Development

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32 questions

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Mosaks, Inc., has a put option with an exercise price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is

$10

$105

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

In a credit default swap (CDS), the buyer of credit protection

makes a series of payments to a credit protection seller

exchanges the return on a bond for a íxed or îoating rate return

issues a security that is paid using the cash îows from an underlying bond

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

A call option has a strike price of $35 and the stock price is $47 at expiration. What is the expiration day value of the call option?

$35

$12

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Credit default swaps are least accurately characterized as

contingent claims

insurance

forward commitments

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is

out-of-the-money by $2.50

in-the-money by $7.50

in-the-money by $10.00

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which of the following statements regarding call options is most accurate? The

call holder will exercise (at expiration) if the exercise price exceeds the stock price

breakeven point for the buyer is the exercise price plus the option premium

breakeven point for the seller is the exercise price minus the option premium

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Jimmy Casteel pays a premium of $1.60 to buy a put option with an exercise price of $145. If the stock price at expiration is $128, Casteel's profit or loss from the options position is

$1.6

$18.4

$15.4

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CFA 1 Der Option

Mosaks, Inc., has a put option with an exercise price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is

In a credit default swap (CDS), the buyer of credit protection

A call option has a strike price of $35 and the stock price is $47 at expiration. What is the expiration day value of the call option?

Credit default swaps are least accurately characterized as

Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is

Which of the following statements regarding call options is most accurate? The

Jimmy Casteel pays a premium of $1.60 to buy a put option with an exercise price of $145. If the stock price at expiration is $128, Casteel's profit or loss from the options position is

An investor buys a call option that has an option premium of $5 and an exercise price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to

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