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Question 1 (2.5 points)

One reason for writing and selling a covered call option is

Question 1 options:

a)	potential leverage

b)	safety of principal

c)	income received

d)

liquidity

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Question 2 (2.5 points)

Call options, unlike warrants, may be written by individuals.

Question 2 options:

	a) True
	b) False

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Question 3 (2.5 points)

If the price of an option to buy stock were to sell for less than its strike price, an opportunity for arbitrage exists.

Question 3 options:

	a) True
	b) False

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Question 4 (2.5 points)

The most the individual who buys a put option can lose is the cost of the option.

Question 4 options:

	a) True
	b) False

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Question 5 (2.5 points)

The intrinsic value of a put establishes the put's maximum price.

Question 5 options:

	a) True
	b) False

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Question 6 (2.5 points)

A call is an option to

Question 6 options:

a)	sell stock at a specified price

b)	buy stock at a specified price

c)	deliver stock at a specified price

d)	deliver bonds at a specified price

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Question 7 (2.5 points)

The profits (gains) on option trading are exempt from federal income taxation.

Question 7 options:

	a) True
	b) False

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Question 8 (2.5 points)

Call options offer buyers

Question 8 options:

a)	potential leverage

b)

liquidity

c)

income

d)	safety of principal

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Question 9 (2.5 points)

When a call option is exercised, new stock is issued.

Question 9 options:

	a) True
	b) False

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Question 10 (2.5 points)

The maximum potential profit on a covered call is the time premium paid for the stock.

Question 10 options:

	a) True
	b) False

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Question 11 (2.5 points)

If investors believe that a stock's prices will fluctuate but they are not certain as to the direction, these investors may buy a straddle.

Question 11 options:

	a) True
	b) False

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Question 12 (2.5 points)

If the investor buys a bear spread, the individual anticipates

Question 12 options:

a)	higher interest rates

b)	higher option prices

c)	lower stock prices

d)	lower put prices

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Question 13 (2.5 points)

If the investor buys a bull spread, the individual anticipates

Question 13 options:

a)	higher call price

b)	higher stock prices

c)	lower stock prices

d)	lower call prices

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Question 14 (2.5 points)

If the investor anticipates that the price of a stock will fluctuate, this individual may

Question 14 options:

a)	sell a call and sell a put

b)	buy a call and buy a put

c)	buy a call and sell a put

d)	sell a call and buy a put

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Question 15 (2.5 points)

The hedge ratio indicates the number of call options that is necessary to offset price movements in the underlying stock.

Question 15 options:

	a) True
	b) False

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Question 16 (2.5 points)

According to the Black/Scholes option valuation model, a call option's value increases if

Question 16 options:

a)	stock prices increase and interest rates decrease

b)	the time to expiration decreases and interest rates increase

c)	the variability of the stock's return increases and stock prices increase

d)	interest rates decrease and the variability of the stock's return increases

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Question 17 (2.5 points)

Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.

Question 17 options:

	a) True
	b) False

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Question 18 (2.5 points)

The protective call strategy is an illustration of a short position.

Question 18 options:

	a) True
	b) False

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Question 19 (2.5 points)

Put-call parity suggests that the sum of the prices of a stock, a call and a put on that stock, and a debt instrument maturing at the expiration of the options must equal zero.

Question 19 options:

	a) True
	b) False

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Question 20 (2.5 points)

Buying a call and a treasury bill produces similar results as buying a stock and a put.

Question 20 options:

	a) True
	b) False