Question 1

In theory, reducing the volatility of its cash flows will always increase a company's value.

Accepted Answer

A) True 
 B)False  False

Question 2

The value of a stock option depends on all of the following EXCEPT:

Accepted Answer

A)   Exercise price.
B)   Variability of the stock price.
C)   Length of time until option expiration.
D)   Risk-free rate of interest.
E)   Bond price.F) B) and D)
G) A) and E)

Question 3

Which of the following statements regarding factors that affect call option prices is CORRECT?

Accepted Answer

A)   The longer the time until the call option expires the smaller its value and the smaller its premium.
B)   An option on an extremely volatile stock is worth less than one on a very stable stock.
C)   The price of a call option increases as the risk-free rate increases.
D)   Two call options on the same stock will have the same value even if they have different strike prices.
E)   If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.F) B) and E)
G) B) and D)

Question 4

One objective of risk management can be to reduce the volatility of a firm's cash flows.

Accepted Answer

A) True 
 B)False

Question 5

Warnes Motors' stock is trading at $20 a share. Three-month call options with an exercise price of $20 have a price of $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 less than $2, but the percentage increase in price will be more than 10%.
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 more than $2.
E)   The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.F) C) and D)
G) D) and E)

Question 6

An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)

Accepted Answer

A)   Call option.
B)   Put option.
C)   Out-of-the-money option.
D)   Naked option.
E)   Covered option.F) A) and E)
G) A) and B)

Question 7

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Accepted Answer

A)   Straddle option.
B)   Put option.
C)   Out-of-the-money option.
D)   Naked option.
E)   Covered option.F) B) and E)
G) B) and C) C

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Put options give investors the right to buy a stock at a certain exercise price before a specified date.
B)   Call options give investors the right to sell a stock at a certain exercise price before a specified date.
C)   Options typically sell for less than their exercise value.
D)   LEAPS are very short-term options that have begun trading on the exchanges in recent years.
E)   Option holders are not entitled to receive dividends unless they choose to exercise their option.F) A) and D)
G) A) and E)

Question 9

The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

Accepted Answer

A) True 
 B)False

Question 10

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Accepted Answer

A)   6.81%
B)   7.17%
C)   7.55%
D)   7.92%
E)   8.32%F) A) and E)
G) A) and D)

Question 11

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

Accepted Answer

A) True 
 B)False

Question 12

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Accepted Answer

A)   Straddle option.
B)   Put option.
C)   Out-of-the-money option.
D)   Naked option.
E)   Covered option.F) A) and E)
G) B) and E)

Question 13

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 103-18. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, round the new interest rate to 4 decimal places when written as a decimal, and round the change in price up to the nearest whole dollar.)

Accepted Answer

A)   -$61.00
B)   -$64.00
C)   -$67.00
D)   -$71.00
E)   -$75.00F) A) and E)
G) A) and D)

Question 14

Which of the following is NOT a way risk management can be used to increase the value of a firm?

Accepted Answer

A)   Risk management can increase debt capacity.
B)   Risk management can help a firm maintain its optimal capital budget.
C)   Risk management can reduce the expected costs of financial distress.
D)   Risk management can help firms minimize taxes.
E)   Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.F) A) and C)
G) A) and E)

Question 15

A riskless hedge can best be defined as

Accepted Answer

A)   A situation in which aggregate risk can be reduced by derivatives transactions between two parties.
B)   A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
C)   Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken.
D)   Two parties agree to exchange obligations to make specified payment streams.
E)   Simultaneously buying and selling a call option with the same exercise price.F) B) and C)
G) A) and E)

Question 16

A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25. Meyers' current stock price is $48. What is the option premium?

Accepted Answer

A)   $4.25
B)   $4.73
C)   $5.25
D)   $5.78
E)   $6.35F) D) and E)
G) A) and B)

Question 17

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 10-year, semiannual payment, 6% coupon Treasury note is 105-21. If the note has a $1,000 par value, what is the implied Treasury note rate?

Accepted Answer

A)   5.27%
B)   5.53%
C)   5.80%
D)   6.10%
E)   6.40%F) B) and C)
G) B) and D)

Question 18

Which of the following statements concerning risk management is NOT CORRECT?

Accepted Answer

A)   Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.
B)   Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, but it doesn't make much sense for most other firms.
C)   Companies with volatile earnings pay more taxes than companies with more stable earnings due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings.
D)   Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress.
E)   Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.F) B) and E)
G) B) and D)

Question 19

Lissa Co.'s stock price is currently $30.25. A 6-month call option on Lissa's stock has a strike price of $25 and has an expected volatility of 40% (i.e., expected standard deviation = 40%) . The risk-free rate is 6%. According to the Black-Scholes option pricing model, what is the value of the option?

Accepted Answer

A)   $5.06
B)   $5.62
C)   $6.24
D)   $6.94
E)   $7.63F) None of the above
G) A) and E) D

Question 20

Which of the following is NOT an example of a derivative security?

Accepted Answer

A)   Futures.
B)   Options.
C)   Swaps.
D)   Forward contracts.
E)   Preferred stock.F) B) and C)
G) B) and E)

Exam 18: Derivatives

In theory, reducing the volatility of its cash flows will always increase a company's value.

Correct Answer
verified
False

The value of a stock option depends on all of the following EXCEPT:

Correct Answer
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Which of the following statements regarding factors that affect call option prices is CORRECT?

Correct Answer
verified

One objective of risk management can be to reduce the volatility of a firm's cash flows.

Correct Answer
verified

Warnes Motors' stock is trading at $20 a share. Three-month call options with an exercise price of $20 have a price of $1.50. Which of the following will occur if the stock price increases 10% to $22 a share?

Correct Answer
verified

An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)

Correct Answer
verified

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Correct Answer
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C

Which of the following statements is CORRECT?

Correct Answer
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The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

Correct Answer
verified

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Correct Answer
verified

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

Correct Answer
verified

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Correct Answer
verified

Correct Answer
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Which of the following is NOT a way risk management can be used to increase the value of a firm?

Correct Answer
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A riskless hedge can best be defined as

Correct Answer
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A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25. Meyers' current stock price is $48. What is the option premium?

Correct Answer
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Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 10-year, semiannual payment, 6% coupon Treasury note is 105-21. If the note has a $1,000 par value, what is the implied Treasury note rate?

Correct Answer
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Which of the following statements concerning risk management is NOT CORRECT?

Correct Answer
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Correct Answer
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D

Which of the following is NOT an example of a derivative security?

Correct Answer
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Exam 18: Derivatives

In theory, reducing the volatility of its cash flows will always increase a company's value.

Correct AnswerverifiedFalse

The value of a stock option depends on all of the following EXCEPT:

Correct AnswerverifiedShow Answer

Which of the following statements regarding factors that affect call option prices is CORRECT?

Correct AnswerverifiedShow Answer

One objective of risk management can be to reduce the volatility of a firm's cash flows.

Correct AnswerverifiedShow Answer

Warnes Motors' stock is trading at $20 a share. Three-month call options with an exercise price of $20 have a price of $1.50. Which of the following will occur if the stock price increases 10% to $22 a share?

Correct AnswerverifiedShow Answer

An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)

Correct AnswerverifiedShow Answer

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Correct AnswerverifiedC

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

Correct AnswerverifiedShow Answer

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Correct AnswerverifiedShow Answer

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

Correct AnswerverifiedShow Answer

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is NOT a way risk management can be used to increase the value of a firm?

Correct AnswerverifiedShow Answer

A riskless hedge can best be defined as

Correct AnswerverifiedShow Answer

A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25. Meyers' current stock price is $48. What is the option premium?

Correct AnswerverifiedShow Answer

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 10-year, semiannual payment, 6% coupon Treasury note is 105-21. If the note has a $1,000 par value, what is the implied Treasury note rate?

Correct AnswerverifiedShow Answer

Which of the following statements concerning risk management is NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

Which of the following is NOT an example of a derivative security?

Correct AnswerverifiedShow Answer

Correct Answer
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False

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Correct Answer
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C

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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D

Correct Answer
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