1. You own a stock, and you’re concerned that the price of the stock may decline. What might you do to minimize risk of loss on the stock?

A. Buy a put

B. Buy a call

C. Write a put

D. Buy a warrant

2. At a single time, a stock’s price is $10 and the premium for a call option on the stock is $3.

The strike price on the option is $8. How should you explain the additional value of the

premium over the difference between strike price and stock price?

A. The stock price and option price may have been quoted at different times when stock

values were different.

B. The market value of the option premium equals the difference between the strike price

and the market value of the stock.

C. The market value of the option premium equals the difference between the stock

market value and the strike price plus a time premium.

D. The hypothetical price of the option is less than the time premium.

3. Which of the following strategies offers the greatest potential to maximize rate of return on a stock if the stock price rises after you implement the strategy?

A. Purchase a stock and supplement your return by purchasing a call option on the stock.

B. Assume a naked position in the stock with a call option.

C. Write a covered put on the stock.

D. Write a naked put on the stock.

4. You speculate that the value of a stock won’t drop, and you’re unwilling to purchase the

stock or pay a premium for an option. What position would you take to profit by the stock’s

price not dropping?

A. Write a put.

B. Purchase a call

C. Write a call.

D. Employ a covered position.

5. What is your profit or loss under the following circumstances when the stock price rises?

You buy a stock at $15 and simultaneously buy a put. The strike price on the put is $12,

and you pay a $5 premium. The stock price rises to $16.

A. $5 loss

B. $4 loss

C. $2 profit

D. $3 profit

6. What is your loss in the following situation? You write a naked put when the stock price is

$50. The strike price is $55, and the stock price drops to $40. Assume the option is near

expiration and the market doesn’t assign any additional value to the option’s intrinsic value.

A. $10

B. $15

C. $20

D. $35

7. What is your profit or loss under the following circumstances? You buy a stock for $30, and

its price suddenly drops to $25. To avoid the risk of further losses, you buy a put with a

$30 strike price for $6. Subsequently, the stock price rises to $35, the option expires, and

you sell the stock.

A. $1 profit

B. $1 loss

C. $6 loss

D. $15 loss

8. What is your profit or loss under the following circumstances? You buy a stock for $25, and

simultaneously write a covered call with a $20 strike price and $7 premium. The stock

price rises to $28, and the buyer exercises the option and you sell your ownership in

the stock.

A. $3 loss

B. $2 loss

C. $2 profit

D. $3 profit

9. Which of the following positions would ordinarily minimize potential loss in terms of

percentage of investment? Assume the loss would be realized during the term of

the option.

A. Purchase a stock at $25.

B. Purchase a stock at $25 and a call on the stock for a $5 premium with a $21

strike price.

C. Purchase a call option for $4.

D. Purchase a stock at $25, and a put on the stock for a $5 premium with a $29

strike price.

10. The risk of shorting a stock is greater than the risk of buying a put because

A. the stock price can fall to zero, while the put limits risk to the amount of the premium.

B. a stock price change results in a relatively smaller change in an option on that stock.

C. the maximum risk of a put is the premium, while the maximum risk of shorting is

unlimited because price can rise without limit.

D. options provide unlimited hedging opportunities that render option positions less risky

than short stock positions.

11. Although arbitrage presents potential profit opportunities, the likelihood of individual

investors finding arbitrage opportunities is limited by

A. the tendency for stock values to fall away from the efficient frontier.

B. hedge strategies that combine option and stock purchases all but eliminate

arbitrage opportunities.

C. stock and option exchange managers, who are required to notify market makers when

arbitrage opportunities present themselves.

D. market makers, who are in a better position to detect and quickly capitalize before gaps

narrow.

12. You know that leverage increases risk because

A. leverage increases the opportunity for greater profits and losses.

B. when you lend money to businesses, you increase your exposure to default risk.

C. leverage magnifies the potential return on an investment.

D. leverage brings with it downside risk caused by the time-limited feature of options.

13. If you owned the stock of a company that had also issued a warrant on its stock, how

could you use the warrant to limit your risk in the stock?

A. Buy the warrant and write a put on the stock.

B. Sell the warrant short.

C. Buy a put on the stock.

D. Buy a put on the stock, and buy the warrant.

14. Suppose that you’re a corn farmer preparing to plant. You want to reduce the risk that corn

prices will drop below $2.20 per bushel next September when you harvest. What is the

best strategy to reduce your risk?

A. Enter a long position in corn futures to accept in September to enhance your profit if

corn prices rise.

B. Enter a futures contract to deliver September corn at a price under $2.20.

C. Enter a long position in corn for futures contracts to accept corn in July.

D. Enter a futures contract to deliver September corn at a price above $2.20.

15. Which of the following is most likely to use currency futures to reduce risk?

A. Foreign currency speculators

B. Corporations that accept and make payments in foreign currencies

C. Households located near international borders

D. Wheat farmers who sell to U.S. exporters developing markets in China

16. You have a long position in soybean futures at $4.75 per bushel. The contract is for 5,000

bushels, and initial margin is $1,215. Maintenance margin is $900. An unexpected late

frost destroys newly planted crops in the Midwestern United States, and the futures price

rises to $5.20 per bushel over the next few trading days. Which of the following results is

most likely?

A. You receive a margin call from your broker.

B. The futures exchange imposes a temporary hold on trading in soybean futures.

C. The contract value rises to $25,000.

D. The contract value rises $2,250.

17. You enter a short position in an oats futures contract. The trading unit is 5,000 bushels,

the futures price is $1.08 per bushel, initial margin is $270, and maintenance margin is

$200. The futures price rises $.02 to $1.10 on projections of poor yields. What is the

most likely result?

A. You consider closing your position to capitalize on a $100 profit.

B. You get a margin call for $70.

C. You get a margin call for $100.

D. The long position exercises the futures contract.

18. Which of the following investors would reduce risk by shorting municipal bonds

with futures?

A. Someone who owns a large portfolio of municipal bonds

B. An investor who has entered a contract to deliver municipal bonds

C. Someone who has entered a futures contract to accept Treasury notes

D. A city that has issued municipal bonds

 19. If you were CFO of a U.S.-based international corporation with significant operations

in Switzerland, which of the following would be the best way to reduce currency risk

through derivatives?

A. Enter a short position in the Swiss franc.

B. Purchase Swiss francs and invest them in Swiss certificates of deposit.

C. Enter a swap agreement so that U.S. operating expenses are paid on behalf of a

corporation based in Switzerland.

D. Enter a swap agreement so that Swiss operating expenses are paid by a corporation based in Switzerland.

 20. Which of the following events would increase a futures price?

A. Inflation declines during the term of the contract.

B. Spot price declines because of excess volume in the commodity.

C. The broker increases the maintenance margin.

D. Interest rates rise faster than expected.