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 C. Write a put
B. Buy a call 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. C. Write a call.
B. Purchase 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 C. $2 profit
B. $4 loss 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 C. $20
B. $15 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 C. $6 loss
B. $1 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 C. $2 profit
B. $2 loss 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.
1. Use the January 1991–December 1995 data only. Strictly on the basis of the correlation of returns,
investments in which three countries would yield the greatest diversification?
A. Brazil, Hungary, Indonesia
B. Turkey, Korea, Chile
C. Turkey, India, Colombia
D. Turkey, Brazil, Malaysia
2. What special advantage do mutual funds confer for investing in emerging markets?
A. Emerging markets typically yield higher rates of returns for a given investment period
because risk is relatively high.
B. The correlation coefficients of returns between emerging and established markets are
generally negative.
C. Emerging funds allow investors to invest in specific markets even though they aren’t
familiar with corporations, laws, and particulars of investing in those markets.
D. Emerging market mutual funds provide diversification not available in global or
international funds.
3. Which of the following investments would certainly increase your risk exposure if most of
your portfolio is dominated by U.S. investments?
A. International investments characterized by a correlation with U.S. investments near zero
B. International investments with high historical rates of return and, therefore, to the right
side of the security market line
C. A mix of European and Pacific Basin stocks purchased through an international
mutual fund
D. International investments in countries where the exchange rate fluctuates excessively
4. If you were supervisor of a mutual fund investment manager working for an international
growth fund, how would you interpret the following situation? The manager recommends
purchase of stock in General Electric, a New York–based corporation. Her rationale for the
purchase is based on the fact that General Electric’s operations and revenue are truly international,
with a substantial proportion of operations and revenue from over a dozen countries.
A. If the manager were permitted to make the purchase, it would violate the fund’s
investment policy.
B. General Electric’s international exposure would enhance the fund’s diversification.
C. General Electric would add to the fund’s diversification, but the corporation’s large size
is contrary to the growth objective for the fund.
D. General Electric’s diverse operations are a favorable attribute, and the company’s
growth would enhance the fund’s growth objective.
5. If you wanted international diversification but wanted to decide which countries you would
invest in, which strategy would you use?
A. Invest through iShares country-specific exchange-traded funds.
B. Invest through a global mutual fund.
C. Invest through World Equity Benchmark shares.
D. Invest in euros.
6. Of the reasons listed below, which is the most important reason to invest internationally?
A. The overall return on international investments exceeds the return on most domestic
investments, thereby increasing total return.
B. International investments may be riskier than domestic investments, but their diversifying
effect can reduce the risk of the entire portfolio.
C. International investments reduce total portfolio risk because returns on international
investments typically have a lower standard deviation than domestic investments.
D. Although domestic investments offer some growth opportunities, the mature domestic
market lacks the number of growth opportunities in emerging economies.
7. If you lived in a nation that didn’t use the Swiss currency for exchange and were invested
in securities issued by the government of Switzerland, you might expect the value of your
investment to rise if
A. you hedged your investment with currency futures.
B. the value of the Euro dropped in relation to the Swiss franc.
C. political uncertainty in France resulted in a decline in your domestic stock market.
D. your domestic currency fell in relation to the Swiss franc.
8. Use Figure 22.4, on page 819, to answer the following question: How would you interpret
observations in the lower-left quadrant?
A. When one country’s return fell below –20 percent, the S&P 500 return was slightly
below zero.
B. After a year that the S&P 500 yielded a return slightly below zero, the EAFE lost more
than 20 percent.
C. Roughly every 20 years, you should expect a negative relationship between EAFE
returns and returns in the S&P 500.
D. Lines AB and CD are nearly equidistant from the observation, exemplifying how
diversification can benefit a portfolio.
9. The importance of market efficiency and its contribution to international investing is that
A. obtaining information on which to base foreign investment information may be difficult.
B. the rapid dissemination of new information and the intense competition among
investors produces efficient U.S. financial markets.
C. foreign firms with securities traded on U.S. exchanges meet SEC disclosure requirements.