Multiple Choice Answers

1. A major disadvantage of using call options to hedge a short position is that:
hedging increases the risk of loss on the short sale.
the option premium and commission reduce profit potential.
the price of the stock may go up.
None of the above
2. What is the conversion ratio of a $1,000 bond convertible at $27 per share? The coupon rate is 10% and the market rate 12%. This company’s common stock is currently trading at $23 per share.

3. A put is said to be “in-the-money” when the strike price is __________ the market price.
equal to
greater than
less than
may be more than one of the above, depending on the option premium

4. Which of the following statements describes the relationship between the market value, pure bond value, and associated stock price related to a convertible bond?
Both increase as the common stock price increases
Market value approaches the pure bond value as the stock price approaches zero.
As stock price increases, the pure bond value increases.
None of the above

5. The ______ is the issuer of all options listed on the exchanges and is responsible for the liquidity and ease of operation of the options market.
Chicago Board Options Exchange
New York Stock Exchange
Options Clearing Corporation
None of the above

6. The settle price shown in a stock index futures table is the:
highest price the contract hit during the day.
closing price for the contract at the end of the day.
price for the contract only for the last day of the contract.
None of the above

7. The high-risk, speculative nature of commodities futures is due primarily to:
the presence of hedgers in the markets.
high leverage brought about by low margin requirements.
Both A and B
None of the above

8. The profit of an index option is determined by:
the total value of the increase in the index.
the total value of the option.
the size of the premium.
More than one above

9. Which of the following is NOT an advantage of investing in stock index futures for the speculator?
The elimination of unsystematic risk
Manipulation by insiders is less likely than with individual securities
Maximum leverage potential
All of the above are advantages

10. Examples of financial futures include:
foreign exchange and interest rate futures.
gold and foreign currencies.
corporate bonds and common stock.
None of the above