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Chapter 7 APMA questions with verified answers
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Chapter 7 APMA questions with verified answers
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Chapter 7 APMADefine each of the following terms related to options - premium - correct answer ✔✔Is the market price
of the option (the price paid by the option buyer to the option seller). Although an option premium may
be stated as $3, for example it represents a price of $300. The premium is stated on a per share basis,
but there are 100 shares in a typical option contract
Define each of the following terms related to options - expiration date - correct answer ✔✔Is the last
date on which an option can be exercised. The standard options expiration a date is the third Friday of
each month. For most options the latest expiration date possible is the end of the furthest three month
interval - a maximum of 9 months.
Define each of the following terms related to options - intrinsic value - correct answer ✔✔The intrinsic
value of an option is the difference between the current market price of the underlying stock and the
per-share exercise price (strike price) of the option. It represents the true value of the option. The
current market price of an option (it's premium) is greater than its intrinsic value. When the intrinsic
value is zero the option will still sell at a premium (it's time premium). Assuming it is still marketable.
Define each of the following terms related to options - time premium - correct answer ✔✔Is the amount
by which an option's price (premium) exceeds its intrinsic value.
Total premium = Intrinsic value + Time Premium
Define each of the following terms related to options - exercise price - correct answer ✔✔The exercise
(strike ) price is the per-share price at which the stock may be purchased (in the case of buying a call) or
sold (in the case of buying a put). The option's intrinsic value is positive (in the money)when the strike
price is lower than the stock's current market value (for a call option); for a put option the intrinsic value
is positive when the strike price is higher than the stock's current market value.
What is a call option and how is its intrinsic value determined - correct answer ✔✔A call option is an
option to buy 100 shares of a stock at a specified price (the strike price) on or before a specified
expiration date. The intrinsic value of a call option is the current market price of the stock minus the per
exercise price(strike price) of the option. For example is a stock's current market price is $42 and the call
exercise is $40, the options intrinsic value is $2. ($42-$40)
, Under what circumstances does a call have a positive intrinsic value. Under what circumstances does it
have no intrinsic value - correct answer ✔✔A call has a positive intrinsic value when the stock's current
market price exceeds the per share exercise price. A call that has a positive intrinsic value is said to be in
the money. A call has a zero intrinsic value when the exercise price equals or exceeds the stock's current
market price. The intrinsic value of a call increases as the current market price of the stock increases
above the strike price. If the common stock is selling for a current market price that equals the strike
price the call option is "at the money." If the stock's current market price is less than the exercise price ,
the call option is " out of the money"
What is a put option and how is its intrinsic value determined - correct answer ✔✔A put option is an
option to sell 100 shares of stock at a specified price (the strike price) at any time before a specified
expiration date. The intrinsic value of a put option is the exercise price of the option minus the current
market price of the stock. For example , if a stock's current market price is $47 and the put's exercise is
$50, the intrinsic value is $3 ($50-$47). The intrinsic value of a put increases as the current market price
of the stock decreases below the strike price.
Under what circumstances does a put have a positive intrinsic value. Under what circumstances does it
have no intrinsic value - correct answer ✔✔A put has a positive intrinsic value when the exercise price
exceeds the stock's current market price. A put with a positive intrinsic value is "in the money." If the
current market price of the stock is greater than the strike price the put has a zero intrinsic value and it is
"out of the money." If the current market price of the stock equals the strike price , the put is "at the
money."
A warrant is a specific type of option. Identify similarities and differences between call option and
warrants -similarities - correct answer ✔✔Both are options to buy a specific stock at a specific price
within a specified period of time. Both have leverage, with a finite life, and profit from a rising stock
price. Both trade on secondary markets.
A warrant is a specific type of option. Identify similarities and differences between call option and
warrants - differences - correct answer ✔✔Call options are created by investors; warrants are issued by
corporations as financing vehicles. The duration of a call when issued is normally no longer than nine
months ; the expiration date of a warrant when it is issued is much longer often several years. When a
warrant is exercised , new stock is issued and the issuing company receives the proceeds. When a call is
exercised the option writer must provide the stock to the option holder from personal holdings or must
provide the stock from a purchase made in the open market. The option writer received income when
the option was first sold.
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