Question 1

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 2

The current price of a stock is $22, and at the end of one 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 binomial model, what is the option's value? (Hint: Use daily compounding.)

Accepted Answer

A)   $2.43
B)   $2.70
C)   $2.99
D)   $3.29
E)   $3.62F) C) and E)
G) C) and D)

Question 3

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 4

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 B)
G) B) and E)

Question 5

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 B)
G) C) and D)

Question 6

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) All of the above
G) A) and E)

Question 7

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 8

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

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

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 11

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) A) and E)
G) B) and D)

Question 12

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  True

Question 13

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) B) and E)
G) A) and E) B

Question 14

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 15

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) B) and E)
G) C) and D)

Question 16

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 17

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False

Question 18

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) A) and B)
G) A) and C)

Question 19

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

Accepted Answer

A)   The higher the strike price on XYZ's options, the higher the option's price will be.
B)   Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
C)   If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.
D)   If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
E)   The price of these call options is likely to rise if XYZ's stock price rises.F) C) and D)
G) A) and C)

Question 20

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) A) and B)
G) B) and D)

Exam 8: Financial Options and Applications in Corporate Finance

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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False

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 is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

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
verified

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

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

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

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

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
True

Correct Answer
verified
B

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
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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

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

Correct Answer
verified

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

Exam 8: Financial Options and Applications in Corporate Finance

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

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 is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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 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

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

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

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 AnswerverifiedTrue

Correct AnswerverifiedB

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

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

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

Correct AnswerverifiedShow Answer

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 Answer
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False

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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True

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B

Correct Answer
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Correct Answer
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