Lesson #13 Quiz >> Financial Markets
1. What are the two types of options?
- A “call” option is the right to buy and a “put” option is the right to sell.
- A “put” option is the right to buy and a “call” option is the right to sell.
- A “get” option is the right to buy and a “push” option is the right to sell.
- A “push” option is the right to buy and a “get” option is the right to sell.
2. Why do some stock options have an exercise price which is more than the cost of the stock?
- For “call” options, this provides the option to buy at this price if the stock goes up before the exercise date.
- These options are “put” options, giving you the option to sell at a higher price.
- The stock options sell for negative prices, because the investor will lose money if the stock price does not fluctuate.
- New investors often mistake “put” and “call” options, leading to an easy profit for the dealer.
3. Which of the following is NOT a behavioral reason why people buy options?
- People will pay attention to specific aspects of their portfolio more so than others, so they will buy options when they hear about volatility in the market to protect certain components of their portfolio.
- They are fooled by salespeople.
- Portfolio managers will usually buy options for clients without them knowing so that if the stock price goes down, the manager will come across as thinking ahead and watching out for their clients.
- People will feel better about themselves if their stocks go down if they have purchased a put option on them, regardless of whether or not they gained or lost overall.
4. Are mortgages in the US similar to options from the perspective of the homeowner?
- No in recourse states, yes in non-recourse states.
- Yes, because they can be sold by banks to Fannie Mae and Freddie Mac.
- No, because defaulting does not eliminate liability.
- Yes, because people always have the option to default.
5. What is the put-call parity relationship?
- Another name for the Black-Scholes model.
- A relationship between the put price, the call price, and the stock price for European-style stock options.
- A method of arbitrage for options exchanges.
- A mathematical formula specifying that the put price of an option minus the call price of an option equals the price of the stock
6. What is a stop-loss order?
- An instruction to your broker indicating that they should sell your shares once it drops below some price.
- The same thing as a put option, except you do not have to pay for it.
- An instruction to your broker indicating that they should sell your shares once they get above a certain price.
- A type of stock that will protect you against losses.