Question 1

Which of the following statements is correct?

Accepted Answer

A)   Put options give investors the right to buy a stock at a certain strike price before a specified date.
B)   Call options give investors the right to sell a stock at a certain strike price before a specified date.
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) B) and C)
F) B) and D)

Question 2

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 3

If the market is in equilibrium, then a call option contract 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  False

Question 4

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

Question 5

Which of the following statements is correct?

Accepted Answer

A)   Call options generally sell at a price less than their exercise value.
B)   If a stock becomes riskier (more volatile) , call options on the stock are likely to decline in value.
C)   Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, 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) C) and D)
F) A) and D)

Question 6

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which circumstance would decrease the value of the options, other things held constant?

Accepted Answer

A)   GCC's stock price becomes more risky (higher variance) .
B)   The exercise price of the option is increased.
C)   The life of the option is increased, i.e., the time until it expires is lengthened.
D)   The government takes actions that increase the risk-free rate.E) C) and D)
F) A) and D)

Question 7

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's stock price actually rises to $45, what would your pre-tax net profit be?

Accepted Answer

A)   -$310.25
B)   $1,689.75
C)   $1,774.24
D)   $1,862.95E) A) and B)
F) A) and C)

Question 8

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

Question 9

Which of the following statements best describes options?

Accepted Answer

A)   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.
B)   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.
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) A) and B)
F) B) and C)

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 (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

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 12

Deeble Construction Co.'s stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in 3 months. Which statement regarding the value of these options is true?

Accepted Answer

A)   The options with the $25 strike price will sell for less than the options with the $35 strike price.
B)   The options with the $25 strike price have an exercise value greater than $5.
C)   The options with the $35 strike price have an exercise value greater than $0.
D)   If Deeble's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.E) A) and D)
F) B) and C)

Question 13

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. 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. What is the value of the call option?

Accepted Answer

A)   $2.81
B)   $3.12
C)   $3.47
D)   $3.82E) A) and B)
F) B) and C) C

Question 14

Which of the following statements is correct?

Accepted Answer

A)   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.
B)   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.
C)   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.
D)   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.E) B) and D)
F) None of the above A

Question 15

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Accepted Answer

A)   in-the-money
B)   naked
C)   covered
D)   out-of-the-moneyE) All of the above
F) None of the above

Question 16

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 17

Call options on XYZ Corporation's common stock trade in the market. Which statement regarding XYZ Corporation's options is true, other things held constant?

Accepted Answer

A)   The price of these call options is likely to rise if XYZ's stock price rises.
B)   The higher the strike price on XYZ's options, the higher the option's price will be.
C)   Assuming the same strike price, an XYZ call option that expires in 1 month will sell at a higher price than one that expires in 3 months.
D)   If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.E) None of the above
F) A) and D)

Question 18

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

Question 19

The current price of a stock is $22, and at the end of 1 year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

Accepted Answer

A)   $2.43
B)   $2.70
C)   $2.99
D)   $3.29E) None of the above
F) A) and B)

Question 20

Which of the following does NOT affect the value of an option, other things held constant?

Accepted Answer

A)   the strike price
B)   the variability of the stock price
C)   the option's time to maturity
D)   the stock betaE) All of the above
F) A) and B)

Exam 19: Financial Options and Applications in Corporate Finance

Which of the following statements is correct?

Correct Answer
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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
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If the market is in equilibrium, then a call option contract 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
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False

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
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Which of the following statements is correct?

Correct Answer
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GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which circumstance would decrease the value of the options, other things held constant?

Correct Answer
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Correct Answer
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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
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Which of the following statements best describes options?

Correct Answer
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As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because (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
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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
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Deeble Construction Co.'s stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in 3 months. Which statement regarding the value of these options is true?

Correct Answer
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Correct Answer
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C

Which of the following statements is correct?

Correct Answer
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A

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Correct Answer
verified

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

Call options on XYZ Corporation's common stock trade in the market. Which statement regarding XYZ Corporation's options is true, other things held constant?

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

The current price of a stock is $22, and at the end of 1 year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

Correct Answer
verified

Which of the following does NOT affect the value of an option, other things held constant?

Correct Answer
verified

Exam 19: Financial Options and Applications in Corporate Finance

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

If the market is in equilibrium, then a call option contract 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 AnswerverifiedFalse

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 AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which circumstance would decrease the value of the options, other things held constant?

Correct AnswerverifiedShow Answer

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 best describes options?

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 (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

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

Deeble Construction Co.'s stock is trading at $30 a share. Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in 3 months. Which statement regarding the value of these options is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

Which of the following statements is correct?

Correct AnswerverifiedA

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Correct AnswerverifiedShow Answer

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

Call options on XYZ Corporation's common stock trade in the market. Which statement regarding XYZ Corporation's options is true, other things held constant?

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 AnswerverifiedShow Answer

The current price of a stock is $22, and at the end of 1 year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

Correct AnswerverifiedShow Answer

Which of the following does NOT affect the value of an option, other things held constant?

Correct AnswerverifiedShow Answer

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False

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C

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A

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