464 Multiple Choice

Vertical Call/Put Spreads

What is a bull call spread?
- A. Buying a call and put at the same strike price.
- B. Buying a call at a lower strike price and selling a call at a higher strike price.
- C. Selling a call at a lower strike price and buying a call at a higher strike price.
- D. Selling a call and put at the same strike price.
  Answer: B
Which of the following best describes a bear put spread?
- A. Buying a put at a higher strike price and selling a put at a lower strike price.
- B. Selling a put at a higher strike price and buying a put at a lower strike price.
- C. Buying a call at a higher strike price and selling a put at a lower strike price.
- D. Selling a call at a higher strike price and buying a put at a lower strike price.
  Answer: A

Straddles, Calendar Spreads, Collars, and Covered Calls

A straddle strategy is best for which type of market expectation?
- A. The market will stay neutral.
- B. The market will be bullish.
- C. The market will be volatile in either direction.
- D. The market will be bearish.
  Answer: C
In a covered call strategy, what does the investor do?
- A. Buys a call and a put at the same strike price.
- B. Buys the underlying asset and sells a call on it.
- C. Sells the underlying asset and buys a call on it.
- D. Buys a put option and sells a call option.
  Answer: B

P&L Calculations, Breakevens, and Intrinsic/Time Value

How is the breakeven price calculated for a long call option?
- A. Strike price - premium paid.
- B. Strike price + premium paid.
- C. Premium paid - strike price.
- D. Premium paid + intrinsic value.
  Answer: B
Intrinsic value of an option is defined as:
- A. The portion of the premium reflecting time decay.
- B. The difference between the option’s strike price and the underlying’s current price.
- C. The time remaining until the option’s expiration.
- D. The impact of market volatility on the option’s price.
  Answer: B

Impact of Interest Rates on Options

As interest rates increase, the value of call options generally:
- A. Increases.
- B. Decreases.
- C. Stays the same.
- D. Depends on the stock's price movement.
  Answer: A
When interest rates fall, which of the following is likely to happen to put options?
- A. Their value will increase.
- B. Their value will decrease.
- C. Their value will remain unchanged.
- D. Their value will become zero.
  Answer: A

Swaps and How They Function

In an interest rate swap, what is commonly exchanged between parties?
- A. Fixed-rate cash flow for floating-rate cash flow.
- B. Stocks for bonds.
- C. Currencies.
- D. Shares of stock for futures contracts.
  Answer: A
Which of the following best describes the purpose of a swap?

A. To speculate on stock prices.
B. To manage risk, particularly interest rate or currency risk.
C. To acquire physical assets.
D. To trade in commodities.
Answer: B

Options on Futures

An option on a future gives the holder the right to:

A. Buy or sell the underlying stock at a set price.
B. Buy or sell the futures contract at a set price.
C. Exchange one currency for another at a fixed rate.
D. Swap fixed and variable interest rates.
Answer: B

A call option on a futures contract would be profitable if:

A. The futures price increases.
B. The futures price decreases.
C. The futures price remains the same.
D. Interest rates decrease.
Answer: A

Early Exercise and Impact on Profit

Early exercise of an American call option is most beneficial when:

A. The option has significant time value.
B. The underlying stock is near its ex-dividend date.
C. Interest rates decrease.
D. The stock price is below the strike price.
Answer: B

What is a primary disadvantage of exercising an option early?

A. Loss of intrinsic value.
B. Loss of remaining time value.
C. Increased margin requirements.
D. Increased volatility.
Answer: B

Initial and Maintenance Margins

Which best describes the initial margin requirement?

A. The minimum balance needed to open a position.
B. The minimum balance to maintain a position.
C. The amount added to profit if a trade is successful.
D. The cost of purchasing an option.
Answer: A

A maintenance margin is:

A. The cost to buy an option.
B. The required balance to keep a position open.
C. A fee for closing a trade.
D. The final profit from a trade.
Answer: B

Cash vs. Physically Delivered Derivatives

A cash-settled derivative requires:

A. Physical delivery of the underlying asset.
B. Cash payment based on the difference between the contract price and market price.
C. Buying shares in the open market.
D. Exercising the option immediately.
Answer: B

Which of the following is an example of a physically delivered derivative?

A. Stock index options.
B. Commodity futures contracts.
C. Currency swap.
D. Interest rate swaps.
Answer: B

Profit Profiles for Long/Short Positions

The profit profile of a long call is best described as:

A. Limited profit with unlimited risk.
B. Limited risk with unlimited profit.
C. Unlimited risk and unlimited profit.
D. Limited profit and limited risk.
Answer: B

A short put position profits when:

A. The underlying price rises above the strike price.
B. The underlying price falls below the strike price.
C. The underlying price remains unchanged.
D. The underlying is extremely volatile.
Answer: A

Cost and Profit of Spreads

To calculate the cost of a vertical spread, you:

A. Subtract the premium received from the premium paid.
B. Add the premium received and premium paid.
C. Multiply the premium paid by the premium received.
D. Add the intrinsic value to the time value.
Answer: A

A bull call spread is profitable if the underlying price:

A. Stays the same.
B. Falls below the lower strike price.
C. Moves above the higher strike price.
D. Moves to the lower strike price.
Answer: C

Time Decay and Its Impact on Options

Which of the following is most impacted by time decay?

A. In-the-money call options.
B. Out-of-the-money call options.
C. Futures contracts.
D. Physical commodities.
Answer: B

As an option nears expiration, its time decay:

A. Slows down.
B. Speeds up.
C. Has no effect.
D. Reverses direction.
Answer: B