Chap020 - Chapter 20 Options Markets: Introduction Multiple...

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Chapter 20 Options Markets: Introduction Multiple Choice Questions 1. The price that the buyer of the option pays to acquire the option is called the A) strike price. B) exercise price. C) execution price. D) acquisition price. E) premium. Answer: E Difficulty: Easy 2. The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A) strike price. B) exercise price. C) execution price. D) A or C. E) A or B. Answer: E Difficulty: Easy 3. The price that the buyer of a put option receives for the underlying asset if she executes her option is called the A) strike price. B) exercise price. C) execution price. D) A or C. E) A or B. Answer: E Difficulty: Easy 4. An American call option allows the buyer to A) sell the underlying asset at the exercise price on or before the expiration date. B) buy the underlying asset at the exercise price on or before the expiration date. C) sell the option in the open market prior to expiration. D) A and C. E) B and C. Answer: E Difficulty: Easy Rationale: An American call option may be exercised (allowing the holder to buy the underlying asset) on or before expiration; the option contract also may be sold prior to expiration. 474 Bodie, Investments, Sixth Edition
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Chapter 20 Options Markets: Introduction 5. A European call option allows the buyer to A) sell the underlying asset at the exercise price on the expiration date. B) buy the underlying asset at the exercise price on or before the expiration date. C) sell the option in the open market prior to expiration. D) buy the underlying asset at the exercise price on the expiration date. E) C and D. Answer: E Difficulty: Easy Rationale: A European call option may be exercised (allowing the holder to buy the underlying asset) on the expiration date; the option contract also may be sold prior to expiration. 6. An American put option allows the holder to A) buy the underlying asset at the striking price on or before the expiration date. B) sell the underlying asset at the striking price on or before the expiration date. C) potentially benefit from a stock price decrease with less risk than short selling the stock. D) B and C. E) A and C. Answer: D Difficulty: Easy Rationale: An American put option allows the buyer to sell the underlying asset at the striking price on or before the expiration date. The put option also allows the investor to benefit from an expected stock price decrease while risking only the amount invested in the contract. 7. A European put option allows the holder to A) buy the underlying asset at the striking price on or before the expiration date. B) sell the underlying asset at the striking price on or before the expiration date.
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Chap020 - Chapter 20 Options Markets: Introduction Multiple...

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