Question 1

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 2

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  False

Question 3

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:

N(d?) and N(d?) 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) None of the above
G) C) and E)

Question 4

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  False

Question 5

Cazden Motors' 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 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 Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
E)   The options with the $25 strike price will sell for $5.F) A) and E)
G) B) and D)

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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) All of the above
G) None of the above

Question 11

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 12

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 13

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 14

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

Question 15

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 16

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 E)
G) B) and D)

Question 17

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 D)
G) A) and E)

Question 18

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 19

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 20

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 D)
G) B) and D)

Exam 8: Financial options and applications in corporate finance

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
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Correct Answer
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False

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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False

Cazden Motors' 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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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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A

Which of the following statements is CORRECT?

Correct Answer
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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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Which of the following statements is CORRECT?

Correct Answer
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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
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

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

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

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

Correct Answer
verified

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

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

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

Exam 8: Financial options and applications in corporate finance

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

Correct AnswerverifiedFalse

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 AnswerverifiedFalse

Cazden Motors' 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 AnswerverifiedShow Answer

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

Correct AnswerverifiedA

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

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

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

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

Correct AnswerverifiedShow Answer

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

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

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 Answer
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False

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False

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A

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