Question 1

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

Question 2

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  True

Question 3

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 4

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 5

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 E)
G) D) and E)

Question 6

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

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

Question 8

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) None of the above
G) All of the above

Question 9

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 10

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  False

Question 11

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 C)
G) A) and D)

Question 12

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 13

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

Question 14

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 15

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

Question 16

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 17

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:
∙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.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) A) and B)
G) A) and D)

Question 18

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 19

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 D)
G) B) and E)

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 B)
G) C) and D)

Exam 8: Financial Options and Applications in Corporate Finance

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

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
True

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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False

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

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

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

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 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
False

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

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

Which of the following statements is CORRECT?

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

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
verified

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

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
verified

Which of the following statements is CORRECT?

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

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

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 AnswerverifiedTrue

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 AnswerverifiedFalse

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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 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 AnswerverifiedFalse

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

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

Which of the following statements is CORRECT?

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

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

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

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

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

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True

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False

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False

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