Question 1

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 binominal model, what is the option's value?

Accepted Answer

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

Question 2

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 3

Which of the following statements is CORRECT?

Accepted Answer

A)  	A reduction in inventories held would have no effect on the currentratio.
B)  	An increase in inventories would have no effect on the currentratio.	
C)  	If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnoverratio will increase.
D)  	A reduction in the inventory turnover ratio will generally lead toan increase in the ROE.
E)  	If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.F) A) and B)
G) A) and C)

Question 4

Warner Motors' 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 $2.
B)   The price of the call option will increase by more than $2.
C)   The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
D)   The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.E) B) and C)
F) B) and D)

Question 5

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 of the following actions would decrease the value of the options, other things held constant?

Accepted Answer

A)   GCC's stock price suddenly increases.
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 Federal Reserve takes actions that increase the risk-free rate.
E)   GCC's stock price becomes more risky (higher variance) .F) B) and C)
G) B) and D)

Question 6

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 7

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 8

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 9

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 10

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Accepted Answer

A) True 
 B)False

Question 11

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things 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 one month will sell at a higher price than one that expires in three months.
D)   If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.
E)   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.F) A) and E)
G) B) and C)

Question 12

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:  ∙\bullet∙ The price of the stock is $40.
 ∙\bullet∙ The strike price of the option is $40.
 ∙\bullet∙ The option matures in 3 months (t = 0.25) .
 ∙\bullet∙ The standard deviation of the stock's returns is 0.40, and the variance is 0.16.
 ∙\bullet∙ The risk-free rate is 6%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
 ∙\bullet∙ d1 = 0.175
 ∙\bullet∙ d2 = -0.025
 ∙\bullet∙ N(d1)  = 0.56946
 ∙\bullet∙ 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)   $4.20 F) A) and E)
G) A) and D)

Question 13

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)   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.F) C) and D)
G) D) and E)

Question 14

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 three months. Which of the following best describes the value of these options?

Accepted Answer

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

Question 15

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

Question 17

Which of the following statements is CORRECT?

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)   Issuing options provides companies with a low cost method of raising capital.
D)   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.
E)   The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.F) None of the above
G) A) and B)

Question 18

An option that gives the holder the right to sell a stock at a specified price at some future time is

Accepted Answer

A)   a call option.
B)   a put option.
C)   an out-of-the-money option.
D)   a naked option.
E)   a covered option.F) A) and E)
G) A) and B) B

Question 19

The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 8: Financial Options and Applications in Corporate Finance

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

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Warner Motors' 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
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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 of the following actions would decrease the value of the options, other things held constant?

Correct Answer
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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
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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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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
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Correct Answer
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If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct Answer
verified

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

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 three months. Which of the following best describes the value of these options?

Correct Answer
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E

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
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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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E

Which of the following statements is CORRECT?

Correct Answer
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An option that gives the holder the right to sell a stock at a specified price at some future time is

Correct Answer
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B

The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

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
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Exam 8: Financial Options and Applications in Corporate Finance

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

Warner Motors' 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

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 of the following actions would decrease the value of the options, other things held constant?

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

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

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

Correct AnswerverifiedShow Answer

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct AnswerverifiedShow Answer

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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 three months. Which of the following best describes the value of these options?

Correct AnswerverifiedE

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

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 AnswerverifiedE

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

An option that gives the holder the right to sell a stock at a specified price at some future time is

Correct AnswerverifiedB

The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

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

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E

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E

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B

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