1. Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices.

a) Higher, Higher

b) Higher, Lower

c) Lower, Lower

d) Lower, Higher

2. Which Statement is correct?

Speculators make money by setting up transactions and are the go betweens in the derivatives market.

A firm should always hedge in order to reduce risk whenever they can

Hedgers do not mind losing money as long as they are reducing their risk

Brokers try to find mispricings in the market where they can buy at a low price and simultaneously sell at a high price without taking on any risk.

3. Which statement regarding executive stock options is correct?

a) They are short term and usually expire after one year.

b) They should reduce agency costs by making managers act like shareholders

c) They are included as compensation expense on the income statement.

d) Managers can sell the options on an exchange