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In June 2007, an investor buys a call option on Amgen stock with an exercise of price of $65 and expiring in January 2009. If the stock price in June 2003 is $60, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS


A) I only
B) II only
C) III only
D) II and III only

E) A) and B)
F) A) and C)

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Briefly explain the relationship between risk and option values.

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Options on volatile (risky) assets are m...

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Figure-2 depicts the: Figure-2 depicts the:   A)  position diagram for the buyer of a call option B)  profit diagram for the buyer of a call option C)  position diagram for the buyer of a put option D)  profit diagram for the buyer of a put option


A) position diagram for the buyer of a call option
B) profit diagram for the buyer of a call option
C) position diagram for the buyer of a put option
D) profit diagram for the buyer of a put option

E) A) and B)
F) C) and D)

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In June 2007, an investor buys a put option on Genentech stock with an exercise of price Of $75 and expiring in January 2009. If the stock price in June 2007 is $80, then this option is: I. in-the-money II. out-of-the-money III. a LEAPS


A) I only
B) II only
C) III only
D) I and III only

E) B) and C)
F) A) and C)

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Briefly explain what is meant by put-call parity?

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The relationship between the value of a ...

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Relative to the underlying stock, a call option always has:


A) A higher beta and a higher standard deviation of return
B) A lower beta and a higher standard deviation of return
C) A higher beta and a lower standard deviation of return
D) A lower beta and a lower standard deviation of return

E) All of the above
F) C) and D)

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A

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

A) True
B) False

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The owner of a regular exchange-listed put-option on the stock:


A) has the right to buy 100 shares of the underlying stock at the exercise price
B) has the right to sell 100 shares of the underlying stock at the exercise price
C) has the obligation to buy 100 shares of the underlying stock at the exercise price
D) has the obligation to sell 100 shares of the underlying stock at the exercise price

E) A) and B)
F) All of the above

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Briefly explain how position diagrams are useful?

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Position diagrams show payoffs at option...

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Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs)


A) The value of two shares of stock
B) The value of one share of stock plus the exercise price
C) The exercise price
D) The value of one share of stock minus the exercise price

E) B) and C)
F) None of the above

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Position diagrams and profit diagrams are one and the same.

A) True
B) False

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False

Briefly explain what is meant by "protective put."

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The combination of a stock and a put opt...

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For European options, the value of a call plus the present value of the exercise price is equal to:


A) The value of a put minus the value of a share
B) The value of a share minus the value of a call
C) The value of a put plus the value of a share
D) The value of a share minus the value of a put

E) B) and C)
F) A) and B)

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The following are examples of disguised options for firms: I. acquiring growth opportunities II. ability of the firm to terminate a project when it is no longer profitable III. options that are associated with corporate securities that provide flexibility to change the terms of the issues


A) I only
B) II only
C) I and III only
D) I, II, and III

E) B) and D)
F) B) and C)

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Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?


A) The seller will need to deliver stock to the owner of the option
B) The seller will be obliged to buy stock from the owner of the option
C) The owner will not exercise his option
D) None of the above

E) C) and D)
F) A) and B)

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The buyer of a call option has the right to exercise, but the writer of the call option has:


A) The choice to offset with a put option
B) The obligation to deliver the shares at exercise price
C) The choice to deliver shares or take a cash payoff
D) The choice of exercising the call or not

E) A) and D)
F) None of the above

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B

The value of an option (both call and put) is positively related to: I. volatility of the underlying stock price II. time to expiration III. risk-free rate


A) I and II only
B) II and III only
C) I and III only
D) III only

E) C) and D)
F) A) and B)

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A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?


A) Lend PV of $100 and buy two calls
B) Lend PV of $100 and sell two calls
C) Borrow $100 and buy two calls
D) Borrow $100 and sell two calls

E) A) and B)
F) A) and C)

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For European options, the value of a put is equal to:


A) The value of a call minus the value of a share plus the present value of the exercise price
B) The value of a call plus the value of a share plus the present value of the exercise price
C) The value of the share minus the value of a call plus the present value of the exercise price
D) The value of the share minus the present value of the exercise price plus the valued of a call

E) C) and D)
F) All of the above

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An increase in the stock price results in an increase in the call option price.

A) True
B) False

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