• Home
  • Textbooks
  • An Introduction to Derivatives and Risk Management: With Stock-Trak Coupon
  • Structure of Options Markets

An Introduction to Derivatives and Risk Management: With Stock-Trak Coupon

Don M. Chance, Robert Brooks

Chapter 2

Structure of Options Markets - all with Video Answers

Educators

Chapter Questions

Problem 1

Compare and contrast the exercise procedure for stock options with that for index options. What major advantage does exercising an index option have over exercising a stock option?

Check back soon!

Problem 2

Contrast the market maker system of the CBOE and Pacific Stock Exchange with the specialist system of the AMEX and Philadelphia Stock Exchange. What advantages and disadvantages do you see in each system?

Check back soon!

Problem 3

Why are short puts and long calls grouped together when considering position limits?

Check back soon!

Problem 4

Determine whether each of the following arrangements is an option. If so, decide whether it is a call or a put and identify the premium.
a. You purchase homeowner's insurance for your house.
b. You are a high school senior evaluating possible college choices. One school promises that if you enroll, it will guarantee your tuition rate for the next four years.
c. You enter into a noncancelable, long-term apartment lease.

Check back soon!

Problem 5

Discuss the limitations of prices obtained from newspapers such as The Wall Street Journal and the advantages of quotes obtained from Web sites of the exchanges.

Check back soon!
01:54

Problem 6

Name and briefly describe at least two other instruments that are very similar to options.

Mirza Aslam Beig
Mirza Aslam Beig
Numerade Educator

Problem 7

What adjustments to the contract terms of CBOE options would be made in the following situations?
a. An option has an exercise price of 60 . The company declares a 10 percent stock dividend.
b. An option has an exercise price of 25 . The company deciares a two-for-one stock split.
c. An option has an exercise price of 85 . The company declares a four-for-three stock split.
d. An option has an exercise price of 50 . The company declares a cash dividend of $$\$ .75$$.

Check back soon!
01:35

Problem 8

Explain the difference between an American option and a European option. What do they have in common?

Vysakh M
Vysakh M
Numerade Educator

Problem 9

Explain each of the terms in the following description of an option: AT\&TJanuary 65 call.

Check back soon!

Problem 10

Explain the major difference between the regulation of exchange-traded options and over-the-counter options.

Check back soon!

Problem 11

Identify and briefly discuss the various types of option transaction costs. How do these costs differ for market makers, floor brokers, and firms trading in the overthe-counter market?

Check back soon!

Problem 12

Explain how real options are similar to, but different from, ordinary options.

Check back soon!

Problem 13

Consider the January, February, and March stock option exercise cycles discussed in the chapter. For each of the following dates, indicate which expirations in each cycle would be listed for trading in stock options.
a. February 1
b. July 1
c. December 1

Check back soon!

Problem 14

Suppose you are an individual investor with an options account at a brokerage firm. You purchase 20 call contracts at a price of $\$ 2.25$ each. Explain how your premium ends up at the clearinghouse.

Check back soon!

Problem 15

Compare and contrast the roles of market maker and floor broker. Why do you think an individual cannot generally be both?

Check back soon!

Problem 16

Explain how the CBOE's order book official (OBO) handles public limit orders.

Check back soon!

Problem 17

Discuss the three possible ways in which an open option position can be terminated. Is your answer different if the option is created in the over-the-counter market?

Check back soon!