1. Which of the following statements is True:

(A) A European call option gives the holder the right to buy the underlying at a predefined price and at any time in the future.

(B) A European call option gives the holder the obligation to buy the underlying at a predefined price and at any time in the future.

(C) A European call option gives the holder the right to buy the underlying at a predefined price and a predefined time in the future.

(D) A European call option gives the holder the obligation to buy the underlying at a predefined price and a predefined time in the future.

(E) A European call option gives the holder the right to buy the underlying at any price and a predefined time in the future.

2. In the Black and Scholes option pricing formula, an increase in a stock's volatility:

(A) Increases the associated call option value

(B) Decreases the associated put option value

(C) Increases or decreases the option value, depending on the level of interest rates

(D) Does not change either the put or call option value because put-call parity holds

(E) Both (A) and (B) are correct

3. A corporation needs to hedge against rising interest rates. It has chosen to use futures on 10-year government bonds. Which position in the futures should the corporation take, and why?

a. Take a short position in the futures because rising interest rates lead to rising futures prices.

b. Take a short position in the futures because rising interest rates lead to declining futures prices.

c. Take a long position in the futures because rising interest rates lead to rising futures prices.

d. Take a long position in the futures because rising interest rates lead to declining futures prices.

4. Consider an Asian option with a maturity of one year and where the average asset price is computed as the arithmetic average of four end-of-quarter prices, given by: $19.00 (end of February), $27.00 (end of May), $18.00 (end of August), and $25.00 (end of November; and the final asset price at option expiration). Which of the following Asian options offers the highest payoff at expiration?

a. An average strike call

b. An average strike put

c. An average price call with strike of $20.00

d. An average price put with strike of $20.00