Question 1

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)   If the underlying stock does not pay a dividend,it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%,because this permits the option holder to lock in an immediate profit.F) A) and D)
G) C) and D)

Question 2

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 3

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 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 E)
G) A) and B)

Question 5

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 6

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) A) and C)
G) None of the above

Question 7

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) B) and D)

Question 8

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

Exam 8: Financial Options and Applications in Corporate Finance

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

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

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

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
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

Correct Answer
verified

Exam 8: 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

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

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

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

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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