Question 1

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price.If the stock price is below the strike price, the exercise value of the call option is zero.

Accepted Answer

A) True 
 B)False  True

Question 2

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Accepted Answer

A) True 
 B)False

Question 3

Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.

Accepted Answer

A) True 
 B)False

Question 4

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Accepted Answer

A)   Variability of the stock price.
B)   Option's time to maturity.
C)   Strike price.
D)   All of the above.
E)   None of the above.F) A) and D)
G) B) and C)

Question 5

If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Accepted Answer

A) True 
 B)False

Question 6

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.

Accepted Answer

A) True 
 B)False  False

Question 7

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Accepted Answer

A)   Put
B)   Naked
C)   Covered
D)   Out-of-the-money
E)   In-the-moneyF) D) and E)
G) A) and B)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
B)   Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
C)   Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
D)   Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E)   If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.F) A) and C)
G) A) and B)

Question 9

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Accepted Answer

A) True 
 B)False

Question 11

If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Accepted Answer

A) True 
 B)False  False

Question 13

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Accepted Answer

A)   The price of the call option will increase by more than $2.
B)   The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C)   The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D)   The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
E)   The price of the call option will increase by $2.F) C) and D)
G) None of the above

Question 14

An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
?The price of the stock is $40.
?The strike price of the option is $40.
?The option matures in 3 months (t = 0.25) .
?The standard deviation of the stock's returns is 0.40, and the variance is 0.16.
?The risk-free rate is 6%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
?D1 = 0.175
?D2 = ?0.025
?N(d1)  = 0.56946
?N(d2)  = 0.49003
N(d1)  and N(d2)  represent areas under a standard normal distribution function.Using the Black-Scholes model, what is the value of the call option?

Accepted Answer

A)   $2.81
B)   $3.12
C)   $3.47
D)   $3.82
E)   $4.20F) B) and D)
G) All of the above

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B)   Issuing options provides companies with a low cost method of raising capital.
C)   The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D)   The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E)   An option's value is determined by its exercise value, which is the market price of the stock less its striking price.Thus, an option can't sell for more than its exercise value.F) C) and E)
G) None of the above

Question 16

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Accepted Answer

A)   $7.33
B)   $7.71
C)   $8.12
D)   $8.55
E)   $9.00F) A) and D)
G) A) and C)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Call options give investors the right to sell a stock at a certain strike price before a specified date.
B)   Options typically sell for less than their exercise value.
C)   LEAPS are very short-term options that were created relatively recently and now trade in the market.
D)   An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
E)   Put options give investors the right to buy a stock at a certain strike price before a specified date.F) C) and D)
G) None of the above

Question 18

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options, other things held constant?

Accepted Answer

A)   The exercise price of the option is increased.
B)   The life of the option is increased, i.e., the time until it expires is lengthened.
C)   The Federal Reserve takes actions that increase the risk-free rate.
D)   BLW's stock price becomes more risky (higher variance) .
E)   BLW's stock price suddenly increases.F) None of the above
G) B) and E)

Question 19

Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?

Accepted Answer

A)   −$5.10
B)   $19.90
C)   $20.90
D)   $22.50
E)   $27.60F) None of the above
G) B) and C)

Question 20

Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?

Accepted Answer

A)   −$3.10
B)   $16.90
C)   $17.75
D)   $22.50
E)   $25.60F) All of the above
G) B) and C)

Exam 8: Financial Options and Applications in Corporate Finance

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price.If the stock price is below the strike price, the exercise value of the call option is zero.

Correct Answer
verified
True

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct Answer
verified

Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.

Correct Answer
verified

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Correct Answer
verified

If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Correct Answer
verified

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.

Correct Answer
verified
False

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Correct Answer
verified

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Correct Answer
verified

Correct Answer
verified

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Correct Answer
verified
False

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options, other things held constant?

Correct Answer
verified

Correct Answer
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Correct Answer
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Exam 8: Financial Options and Applications in Corporate Finance

If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price.If the stock price is below the strike price, the exercise value of the call option is zero.

Correct AnswerverifiedTrue

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct AnswerverifiedShow Answer

Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.

Correct AnswerverifiedShow Answer

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Correct AnswerverifiedShow Answer

If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Correct AnswerverifiedShow Answer

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.

Correct AnswerverifiedFalse

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

Correct AnswerverifiedShow Answer

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Correct AnswerverifiedFalse

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options, other things held constant?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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True

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False

Correct Answer
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False

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