LOS b: Identify the types of options in terms of the underlying instruments.

Q1. Financial options include all of the following EXCEPT options on:

A)   futures.

B)   interest rates.

C)   foreign currencies.

Q2. An option to buy Mexican pesos is:

A)   a currency option.

B)   an exchange rate option.

C)   a foreign option.

Q3. Which of the following statements regarding interest-rate options is least accurate?

A)   Call option values move in the same direction as interest rates.

B)   They are based on a specific interest rate rather than a bond.

C)   They are based on a fixed income security.

Q4. An option is settled in cash, with nothing delivered. The long payoff is the difference between the security value and the strike price, multiplied by a contract multiplier. The option is a(n):

A)   commodity option.

B)   futures option.

C)   index option.

LOS b: Identify the types of options in terms of the underlying instruments. fficeffice" />

Q1. Financial options include all of the following EXCEPT options on:

A)   futures.

B)   interest rates.

C)   foreign currencies.

Correct answer is A)

Options on futures are considered a separate type of options.

Q2. An option to buy Mexican pesos is:

A)   a currency option.

B)   an exchange rate option.

C)   a foreign option.

Correct answer is A)

Options on foreign currencies are called currency options and cover a specific number of foreign currency units.

Q3. Which of the following statements regarding interest-rate options is least accurate?

A)   Call option values move in the same direction as interest rates.

B)   They are based on a specific interest rate rather than a bond.

C)   They are based on a fixed income security.

Correct answer is C)

Treasury bond or bill options are options on fixed income securities. Interest rate options are based on a specific reference rate and interest rate calls have positive payoffs when the reference rate is above the rate specified in the contract.

Q4. An option is settled in cash, with nothing delivered. The long payoff is the difference between the security value and the strike price, multiplied by a contract multiplier. The option is a(n):

A)   commodity option.

B)   futures option.

C)   index option.

Correct answer is C)

Options on stock indexes are only settled in cash and require a multiplier to determine the payoff. Futures options give the holder the right to buy or sell a futures contract, but require no multiplier. Commodity options give the holder the right to buy or sell physical goods.

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