TIF_ch12 - Test Bank Chapter 12 RISK RETURN AND CONTINGENT...

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Test Bank Chapter 12: RISK, RETURN, AND CONTINGENT OUTCOMES EFS I. True or False (Definitions and Concepts) F 1. A put option gives the owner the right to buy an asset at a specified price and date. (FALSE: Should be call instead of put.) T 2. An option is the right, but not the obligation, to do something. T 3. A call option is the right to buy an asset while a put option is the right to sell an asset. F 4. An option is in-the-money if exercising the option will not provide a monetary gain. (FALSE: Should be out-of-the-money instead of in-the-money.) T 5. The strike price is the price at which the purchaser of an option contract may buy or sell the underlying asset when the option is exercised. F 6. Auto insurance can be viewed as a call option because when an auto is stolen or seriously damaged, the owner can exercise the option to "sell" the auto to the insurance company for the insured amount. (FALSE: Should be viewed as a put option instead of viewed as a call option.) F 7. An option is a claim to the "good" outcomes with an obligation to take the "bad" outcomes. (FALSE: Should be without an obligation instead of with an obligation.) T 8. An option is a contingency claim because it is only exercised if particular conditions occur. F 9. The time premium of an option is the extra value below the exercise value provided by having control of when to exercise. (FALSE: Should be extra value above instead of extra value below.) T 10. Ignoring transaction costs, the break-even point of an option is its strike price. T 11. It is generally better to sell an option before expiration than to exercise it. F 12. A European option is worth more than an American option that has the flexibility of being exercised earlier. (FALSE: Should be never worth more instead of worth more.) F 13. An option is in-the-money if exercising the option will provide a monetary loss. (FALSE: Should be gain instead of loss.) T 14. Real estate developers purchase call options on land. T 15. For a put option, the intrinsic or exercise value of an asset is its strike price minus its current price II. Multiple Choice (Definitions and Concepts) d 16. The time premium does which of the following?
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a. It decreases as the option approaches expiration. b. It is determined by the risk of the underlying asset. c. It is the extra value (above the exercise value) provided by having control. d. all of these c 17. The exercise value is determined by what? a. the underlying asset's current market value b. the option’s strike price c. a & b d. none of these b 18. Which of the following is true? a. A warrant is a short-term (less than one year) call option on a stock. b. Warrants are sometimes traded on stock exchanges. c. A warrant is like a nonconvertible bond. d. none of these d 19. The Wall Street Journal lists publicly traded options including .
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TIF_ch12 - Test Bank Chapter 12 RISK RETURN AND CONTINGENT...

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