ch19[1] - Chapter 19 OPTIONS Multiple Choice Questions...

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Chapter 19 OPTIONS Multiple Choice Questions Overview 1. Another name for securities which give the holder the right to buy or sell shares of stock under specified conditions is: a. CMOs b. options c. treasury stock d. a commitment (b, easy) Why Have Derivative Securities? 2. One important reason for the existence of derivatives is that they: a. help lower transactions costs. b. have valuable tax benefits. c. contribute to market completeness. d. are risk-free. (c, moderate) 3. Which of the following is not a reason for investors to participate in options? a. Options eliminate leverage. b. Options are a smaller investment than stock investments. c. Options allow investors to trade on the overall market movements. d. Options can reduce risk. (a, moderate) Introduction to Options 4. The standard option contract is for: a. 10 shares of stock b. 50 shares of stock c. 100 shares of stock d. 1 share of stock (c, easy) Chapter Nineteen Options 240
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5. An option that allows the investor to buy stock under specified conditions is called a: a. call b. put c. derivative d. future (a, easy) 6. An option that allows the investor to sell stock under specified conditions is called a: a. call b. put c. derivative d. future (b, easy) Understanding Options 7. A major difference between new shares being sold by a corporation and shares sold under a call option is that: a. there is no profit or loss under the shares sold under the call. b. there is no risk to the investor with the call. c. there is no increase in the shares outstanding with the call. d. there is no commission to the investor with the call. (c, moderate) 8. LEAPS are typically: a. cheaper than short-term options. b. more expensive than short-term options. c. less risky than short-term options. d. more risky than short-term options. (c, moderate) Chapter Nineteen Options 241
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9. The exercise price on an option is also known as the: a. premium. b. strike price. c. theoretical value. d. spot price. (b, easy) 10. Which of the following statements is true regarding American and European options? a. American options can be exercised only at expiration. b. American options can be exercised only in the last week prior to expiration. c. European options can be exercised only at expiration. d. European options can be exercised any time prior to expiration. (c, moderate) 11. Which of the following statements is true regarding a call writer: a. The call writer expects the stock to move upward. b. The call writer expects the stock to remain the same or move down. c. The call writer expects the stock to split. d. The call writer expects to sell the stock prior to expiration of the option. (b, difficult) 12. To hedge a short sale, an investor could a. buy a call. b.
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ch19[1] - Chapter 19 OPTIONS Multiple Choice Questions...

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