1) Which of the following statements is false?

A) A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.

B) A stock option gives the holder the option to buy or sell a share of stock on or before agiven date for a given price.

C) A call option gives the owner the right to buy the asset.

D) A put option gives the owner the right to sell the asset.

2) Which of the following statements is false?

A) The option seller, also called the option writer, sells (or writes) the option and has a short position in the contract.

B) When the exercise price of an option is equal to the current price of the stock, the option is said to be at-the money.

C) A holder would not exercise an in-the-money option.

D) Because the long side has the option to exercise, the short side has an obligation to fulfillthe contract.

3) The writer of a call option has

A) the right to sell a security for a given price.

B) the obligation to sell a security for a given price.

C) the obligation to buy a security for a given price.

D) the right to buy a security for a given price.

4) Using options to reduce risk is called A) speculation.

B)a naked position

C) a covered position.

D)hedging

5) The market price of an option is called the A) European premium.

B)exercising premium

C) option premium.

D)American premium.

6) The payoff to the holder of a put option is given by: A) P= max(S - K, 0)

B) P = max(K, 0) C) P=max(K-S,0)

D) P=min(S-K,0)

7) An option strategy in which you hold a long position in both a put and a call option with the 7) same strike price is called

A) portfolio insurance.

b) a straddle.

c) a strangle.

D) a butterfly spread.

8) You pay $3.25 for a call option on Luther Industries that expires in three months with a strike 8) price of $40.00. Three months later, at expiration, Luther Industries is trading at $41.00 per share. Your profit per share on this transaction is closest to?

A) -$1.00

B) $2.25

C) -$2.25

D) $1.00

9) Luther Industries is currently trading for $27 per share. The stock pays no dividends. A 9) one-year European put option on Luther with a strike price of $30 is currently trading for $2.60. If the risk-free interest rate is 6% per year, then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:

A) $1.30

B) $2.60

C) $1.95

D) $7.10

10) KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock 10) with a strike price of $30. The intrinsic value of this put option is:

A) $2

B) $0 11

C) $30

D) -$2

11. Consider the following equation:

C = S - K + dis(K) + P - PV(Div)

In this equation, dis(K) + P - PV(Div) tells us

A) the market value of the option.

B) the time value of the option.

C) the difference in the price of an American option over a European option because of dividend capture.

D) the intrinsic value of the option.

12) A credit default swap is essentially a

A) call option on the firm?s debt.

C) call option on the firm?s assets.

B) put option on the firm?s debt

. D) put option on the firm?s assets.

14) If interest rates are currently 5%, but fall to 4%, your estimate of the approximate change in 14) SFTSL equity is closest to:

A) 8% decrease B)

8% increase C)

12% decrease D)

14% increase

15) Which of the following statements is false? A) Just as the interest rate sensitivity of a single cash flow increases with its maturity, the interest rate sensitivity of a stream of cash flows increases with its duration.

B) A firm?s market capitalization is determined by the difference in the market value of its assets and its liabilities.

C) We can measure a firm?s sensitivity to interest rates by computing the duration of its balance sheet.

D) By restructuring the balance sheet to increase its duration, we can hedge the firm?s interest rate risk.

16) Which of the following statements is false?

A) Adjusting a portfolio to make its duration neutral is sometimes referred to as immunizing

the portfolio, a term that indicates it is being protected against interest rate changes.

B) When the durations of a firm?s assets and liabilities are significantly different, the firm has a duration mismatch.

C) The duration of a portfolio of investments is the simple average of the durations of each investment in the portfolio.

D) As interest rates change, the market values of the securities and cash flows in the

portfolio change as well, which in turn alters the weights used when computing the duration as the value-weighted average maturity.

17) What is the duration of a five-year zero-coupon bond?

17) A) 2.5 Years

B) 5 Years

C) 0 Years

D) 1 Year

18) The duration of a five-year bond with 8% annual coupons trading at par is closest to:

18) A) 4.3 Years

B) 6.2 Years

C) 5.0 Years

D) 2.5 Years