1) Arbitrage is the act of simultaneously buying

1) Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.
Question 1 options:
a) True
b) False

2) The writer of a naked call option wants
Question 2 options:
a) the prices of the stock and the call to rise
b) the prices of the stock and the call to fall
c) the prices of the stock to fall and the call to rise
d) the prices of the stock to rise and the call to remain stable
3) Stock index options
1. permit the investor to short the market instead of individual stocks
2. require delivery of an index of stocks
3. limit the buyer’s potential loss to the cost of the option
Question 3 options:
a) 1 and 2
b) 1 and 3
c) 2 and 3
d) all of the above
4) Calls tend to sell for a time premium that exceeds the stock’s price.
Question 4 options:
a) True
b) False
5) The value of a put rises as the price of
Question 5 options:
a) stock rises
b) a call falls
c) stock falls
d) a call rises
6) If an investor constructs a covered call,
Question 6 options:
a) there is no limit to the potential profit

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b) risk is increased
c) risk is reduced
d) the term of the position is increased
7) Because of the small cash outlay to buy an option, these securities are considered to be conservative investments.
Question 7 options:
a) True
b) False

8) Which of the following is premised on lower stock prices?
Question 8 options:
a) buying a stock index call
b) buying a stock index put
c) buying a stock and selling a call
d) buying a stock and selling a put

9) In addition to put and call options on individual stocks, there are also options on the market as a whole (i.e., an index).
Question 9 options:
a) True
b) False
10) A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.
Question 10 options:
a) True
b) False
11) The Black/Scholes option valuation model divides the option’s strike price by the probability that the option will be
exercised.
Question 11 options:
a) True
b) False
12) An investor cannot buy and sell two different call options with the same expiration dates.
Question 12 options:
a) True
b) False
13) Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.

Question 13 options:
a) True
b) False
14) If the hedge ratio is 0.7, the number of call options necessary to offset a long position in a stock is 7.0.
Question 14 options:
a) True
b) False
15) If investors believe that a stock’s prices will fluctuate but they are not certain as to the direction, these investors may buy
a straddle.
Question 15 options:
a) True
b) False
16) According to the Black/Scholes option valuation model, the value of a call option rises as interest rates increase.
Question 16 options:
a) True
b) False
17) The hedge ratio indicates the number of call options that is necessary to offset price movements in the underlying stock.
Question 17 options:
a) True
b) False

18) To construct a bear spread, the investor buys a call option and shorts the stock.
Question 18 options:
a) True
b) False
19) Bull and Bear spreads require taking a long position in one option and a short position in another option with a different
strike price.
Question 19 options:
a) True
b) False
20) If the investor anticipates that the price of stock will be stable, he or she may
Question 20 options:

a) sell a straddle
b) buy a straddle
c) buy a call
d) buy a put