Test Bank For An Introduction to Derivatives and Risk Management 10th Edition By Don M

Test Bank For An Introduction to Derivatives and Risk Management 10th Edition By Don M

CHAPTER 2:  STRUCTURE OF OPTIONS MARKETS

MULTIPLE CHOICE TEST QUESTIONS

1. Identify the true statement regarding the largest derivatives exchanges.

a. CME Group is one of the top five largest derivatives exchanges, based on volume

b. Intercontinental Exchange is one of the top five largest derivatives exchanges, based on volume

c. The volume of trading exceeded one billion on each of the top five derivatives exchanges

d. Among the top 20 derivatives exchanges, several different continents are represented

e. all of the above

2. A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at

a. $2

b. $32

c. $33

d. $35

e. none of the above

3. A put option in which the stock price is $60 and the exercise price is $65 is said to be

a. in-the-money

b. out-of-the-money

c. at-the-money

d. exercisable

e. none of the above

4. Organized options markets are different from over-the-counter options markets for all of the following reasons except

a. exercise terms

b. physical trading floor

c. regulation

d. standardized contracts

e. credit risk

5. The number of options acquired when one contract is purchased on an exchange is

a. 1

b. 5

c. 100

d. 500

e. 8,000

6. The advantages of the over-the-counter options market include all of the following except

a. customized contracts

b. privately executed

c. freedom from government regulation

d. lower prices

e. none of the above

7. Which one of the following is not a type of transaction cost in options trading?

a. the bid-ask spread

b. the commission

c. clearing fees

d. the cost of obtaining a quote

1. all of the above

8. If the market maker will buy at 4 and sell at 4.50, the bid-ask spread is

a. 8.50

b. 4.25

c. 0.50

d. 4.00

e. none of the above

9. Which of the following is a legitimate type of option order on the exchange?

a. purchase order

b. limit order

c. execution order

d. floor order

e. all of the above

10. The exercise price can be set at any desired level on each of the following types of options except

a. FLEX options

b. equity options

c. over-the-counter options

d. all of the above

e. none of the above

11. An investor who owns a call option can close out the position by any of the following types of transactions except

a. exercise

b. offset

c. expiring out-of-the-money

d. buying a put

e. none of the above

12. Which of the following is not the task of market makers?

a. provide liquidity

b. offer to buy and sell

c. provide price transparency

d. work as a sole specialist

e. none of the above

13. The option price is also referred to as the

a. strike

b. spread

c. premium

d. fee

e. none of the above

14. Which of the following contract terms is not set by the futures exchange?

a.the dates on which delivery can occur

b.the expiration months

c.the price

d.the deliverable commodities

e.the size of the contract

15. If an investor exercises a cash settled derivative, 

a. the transaction entails only a bookkeeping entry

b. must purchase the underlying instrument from the writer

c. immediately buy a put option to offset the call option

d. immediately write another call option to offset

e. none of the above