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    CH 10 Derivitives Questions For Class With Answers

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    chris
    This document contains 15 multiple choice questions about derivatives, including options, futures, forwards, and warrants. The questions cover topics such as put and call options, strike prices, cash flows from options purchases, European vs American style options, exercising in and out of the money options, reasons for purchasing calls, covered vs naked calls, break even prices, obligations of long and short parties in forwards and futures, marking to market, reasons for rights offerings, calculating the value of rights, and calculating the time value of warrants.

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    CH 10 Derivitives Questions For Class With Answers

    Uploaded by

    chris
    159 views4 pages
    This document contains 15 multiple choice questions about derivatives, including options, futures, forwards, and warrants. The questions cover topics such as put and call options, strike prices, cash flows from options purchases, European vs American style options, exercising in and out of the money options, reasons for purchasing calls, covered vs naked calls, break even prices, obligations of long and short parties in forwards and futures, marking to market, reasons for rights offerings, calculating the value of rights, and calculating the time value of warrants.

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    This document contains 15 multiple choice questions about derivatives, including options, futures, forwards, and warrants. The questions cover topics such as put and call options, strike prices, cash flows from options purchases, European vs American style options, exercising in and out of the money options, reasons for purchasing calls, covered vs naked calls, break even prices, obligations of long and short parties in forwards and futures, marking to market, reasons for rights offerings, calculating the value of rights, and calculating the time value of warrants.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    159 views4 pages

    CH 10 Derivitives Questions For Class With Answers

    Uploaded by

    chris
    This document contains 15 multiple choice questions about derivatives, including options, futures, forwards, and warrants. The questions cover topics such as put and call options, strike prices, cash flows from options purchases, European vs American style options, exercising in and out of the money options, reasons for purchasing calls, covered vs naked calls, break even prices, obligations of long and short parties in forwards and futures, marking to market, reasons for rights offerings, calculating the value of rights, and calculating the time value of warrants.

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    © All Rights Reserved
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    of 4

    Derivatives Review Questions Chapter 10

    1. The writer of a put option…


    a) pays the premium and has the right to buy.
    b) pays the premium and has the obligation to sell.
    c) receives the premium and has the right to sell.
    d) receives the premium and has the obligation to buy.
    2. An investor bought 3 GE OCT 30 Calls @ $2. What does the “30” refer to?
    a) the strike price
    b) the option’s price
    c) the potential profit
    d) the underlying’s current price
    3. Referring to the Question #2, what would happen in the client’s account immediately
    upon completion of the purchase?
    a) The cash position would be reduced by $600. (3X100X$2)
    b) The cash position would be reduced by $9,000.
    c) The cash position would be reduced by $9,600.
    d) The cash position would be unaffected until exercise occurred.
    4. European-style options mean that…
    a) the option multiplier is 100.
    b) the options are cash settled.
    c) they are traded internationally.
    d) exercise takes place when the option expires.
    5. Which of the following options would be exercised?
    a) A $20 put purchased for $3 when the underlying is $22.
    b) A $40 call purchased for $1 when the underlying is $40.
    c) A $50 call purchased for $10 when the underlying is $51.
    d) A $30 put purchased for $2 when the underlying is $31.
    6. If a put has an exercise price of $45 and the underlying security is $44, we would refer to
    that option as…
    a) in the money.
    b) out of the money.
    c) having no time value.
    d) having no intrinsic value.
    7. All of the following are reasons to purchase call options except…
    a) to fix a future price.
    b) to close out a position.
    c) to enjoy the benefits of leverage.
    d) to insure against a future drop in price.
    8. If an investor sells a call option but does not own the underlying asset on which the
    option is based, that investor is known as…
    a) naked.
    b) covered.
    c) risk-averse.
    d) openly interested.
    9. An investor buys a put option with a $25 exercise price. The premium for it is $2. If the
    option has $2 of time value when it is purchased, what is the break-even price for the
    investor?
    a) $23 ($25-$2=$23)
    b) $25
    c) $27
    d) $29

    10. When two counter-parties enter into a forward agreement…


    a) both are obligated to participate in the future trade.
    b) only the long party is obligated to participate in the future trade.
    c) only the short party is obligated to participated in the future trade.
    d) neither party is obligated to participate in the future trade.
    11. A futures contract is held to expiration. This means that…
    a) the long party will have to make payment to the short.
    b) the short party will have to make payment to the long.
    c) the long party will have to make payment to the short and the short party will
    have to deliver the underlying asset.
    d) the short party will have to make payment to the long and the long party will
    have to deliver the underlying asset.

    12. Marking-to-market is an important feature of…


    a) options trading.
    b) futures trading.
    c) forward trading.
    d) both futures and forward trading.

    13. Companies choose to raise additional funds through a rights offering for all the following
    reasons except…
    a) Current market conditions may not be conducive to an ordinary share issue.
    b) The company wants to give existing shareholders the opportunity to acquire
    additional shares.
    c) A rights issue more highly leverages the company, improving ROE.
    d) A rights issue allows shareholders to maintain their proportionate interest in the
    company.

    14. A stock trades for $11 per share. It announces a rights offering where 3 rights plus $10
    will qualify the investor for one more treasury share. What is the value of one right
    during the cum-rights period?
    a) $ .25 ($11-$10)/(3+1)
    b) $ .33
    c) $ .50
    d) $1.00
    15. A warrant is issued with the following terms: One warrant plus $10 entitles the
    shareholder to one Treasury share. The warrants trade for $8. If the shares have a par
    value of $1 and are trading for $16 at the time of issue, the time value of the warrants
    would be…
    a) $1.
    b) $2. Share price$16- $10 = Intrinsic Value, IV - Warrant price $8 = TV = $2
    c) $6.
    d) $8.
    You could buy the shares right now for $16. The warrants would cost you $8, and then
    it would take another $10 to buy one share. The time value is the difference between
    the two alternatives, or $2.
    IV = (Market Price Per Share – Exercise Price)
    IV = 16-10 = 6
    TV = Market Price of the Warrant – Intrinsic Value
    TV = 8 – 6 = 2

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