Unspecified (General Knowledge) Quiz

Question 1

Which of the following is a key characteristic of a 'call option' in financial markets?

Accepted Answer

It gives the holder the right, but not the obligation, to buy an underlying asset at a specified price.

Answer

It gives the holder the right, but not the obligation, to sell an underlying asset at a specified price.

Answer

It obligates the holder to buy an underlying asset at a specified price.

Answer

It obligates the holder to sell an underlying asset at a specified price.

Question 2

In the context of a Black-Scholes model, what does an increase in the volatility of the underlying asset typically do to the price of a call option and a put option, respectively?

Accepted Answer

Increases both call and put prices.

Answer

Decreases call price, increases put price.

Answer

Increases call price, decreases put price.

Answer

Decreases both call and put prices.

Question 3

Consider a European call option with a strike price of $50, expiring in 3 months. The current stock price is $52. The risk-free rate is 5% per annum (continuously compounded), and the stock's volatility is 20% per annum. Using the Black-Scholes formula, which of the following parameters would be used for 'T' (time to expiration) and 'K' (strike price) in the calculation?

Accepted Answer

T = 0.25, K = 50

Answer

T = 3, K = 50

Answer

T = 3, K = 52

Answer

T = 0.25, K = 52

Question 4

A trader sells a 'naked call' option. What is the primary risk associated with this strategy?

Accepted Answer

Unlimited loss potential if the stock price rises significantly.

Answer

The risk of the option expiring worthless, leading to a loss of premium.

Answer

Limited profit potential if the stock price falls.

Answer

The obligation to buy the stock at a higher price than the market.

Question 5

Which of the following 'Greeks' measures the sensitivity of an option's price to changes in the underlying asset's volatility?

Accepted Answer

Vega

Answer

Delta

Answer

Theta

Answer

Gamma

Question 6

An investor holds a long position in a call option and a short position in a put option, both with the same strike price and expiration date. This combination is known as a:

Accepted Answer

Synthetic long stock

Answer

Butterfly spread

Answer

Straddle

Answer

Strangle

Question 7

What is the primary reason for using a 'collar' strategy in options trading?

Accepted Answer

To protect against a significant drop in the value of a stock holding while limiting upside potential.

Answer

To speculate on high volatility in the underlying asset.

Answer

To generate income from a neutral stock outlook.

Answer

To profit from a significant increase in the underlying stock price.

Question 8

If an option has a Delta of 0.60, and the underlying stock price increases by $1, what is the approximate expected change in the option's price?

Accepted Answer

The option price will increase by $0.60.

Answer

The option price will increase by $1.60.

Answer

The option price will decrease by $1.60.

Answer

The option price will decrease by $0.60.

Question 9

Which of the following statements about 'in-the-money' options is correct?

Accepted Answer

A call option is in-the-money if its strike price is below the current stock price.

Answer

A put option is in-the-money if its strike price is below the current stock price.

Answer

Both call and put options are in-the-money if their strike price equals the current stock price.

Answer

A call option is in-the-money if its strike price is above the current stock price.

Question 10

An investor buys a call option with a strike price of $100 for a premium of $5. At expiration, the stock price is $108. What is the investor's net profit or loss?

Accepted Answer

Profit of $3

Answer

Loss of $5

Answer

Profit of $13

Answer

Profit of $8

Unspecified (General Knowledge) Quiz

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