Question

Identify each statement as being either TRUE or FALSE (1 point each).

1. If you are short a put option that is exercised, and you are assigned, then you are required to sell the stock at the strike price.
2. An American option can be exercised only at the expiration date.
3. A call option gives the owner the right to purchase a fixed number of shares at a specified price, but no right to receive dividends paid during the life of the option.
4. A put option with a strike price of 45 is out of the money if the spot price of the underlying asset is 40.
5. Requiring a letter of credit or collateral is a way to protect oneself from counterparty credit risk.

Answer 1

A short put option gives a right to the buyer to sell the asset to the seller at the strike price. So. the seller will be required to buy the option at the strike price. FALSE

An American option can be exercised at any time before its expiry. FALSE

A call option gives the owner the right to purchase a fixed number of shares at a specified price, but no right to receive dividends paid during the life of the option. TRUE

A put option is out of the money if the strike price is less than the spot price.  So, A put option with a strike price of 45 is In of the money if the spot price of the underlying asset is 40. FALSE

Requiring a letter of credit or collateral is a way to protect oneself from counterparty credit risk. TRUE