Question 1

Which of the following best describes an option contract in principle?

Accepted Answer

A)  An option is a contract that gives its holder the obligation to buy or sell an asset at a predetermined price within a specified period of time.
B)  An option is a contract that gives its seller the right to buy or sell an asset at a predetermined price within a specified period of time.
C)  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.
D)  An option is a contract that gives its writer the right to buy or sell an asset at a predetermined price within a specified period of time.E) C) and D)
F) B) and C)

Question 2

If the market is in equilibrium,then a call option contract 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 3

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Accepted Answer

A)  in-the-money
B)  naked
C)  covered
D)  out-of-the-moneyE) A) and C)
F) All of the above C

Question 4

Which best describes the strike price on an option contract?

Accepted Answer

A)  The strike price is the price that must be paid for a common share when it is bought by exercising a conversion warrant.
B)  The strike price is the price that must be paid for an option contract when it is bought or sold.
C)  The strike price is the price that must be paid for a common share when it is bought by exercising a right.
D)  The strike price is the price that must be paid for a common share when it is bought by exercising the option.E) None of the above
F) B) and C)

Question 5

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 6

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc.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.What is the value of the call option?

Accepted Answer

A)  $2.81
B)  $3.12
C)  $3.47
D)  $3.82E) A) and D)
F) None of the above C

Question 7

Which term refers to an option that gives the holder the right to buy a stock at a specified price at some future time?

Accepted Answer

A)  a call option
B)  a put option
C)  a naked option
D)  a covered optionE) B) and C)
F) A) and D)

Question 8

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)  $7.71
B)  $8.12
C)  $8.55
D)  $9.00E) B) and C)
F) A) and B)

Question 9

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 10

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) None of the above
F) B) and D)

Question 11

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.What will happen 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, 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) None of the above
F) All of the above

Question 12

The current price of a stock is $25,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $35 sells for $5.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Accepted Answer

A)  $13.71
B)  $18.12
C)  $18.55
D)  $19.00E) None of the above
F) A) and C)

Question 13

Which of the following best describe the exercise value of a call option?

Accepted Answer

A)  The exercise value of a call option 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.
B)  The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is greater than zero if the stock's price is below the strike price.
C)  The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is negative if the stock's price is below the strike price.
D)  The exercise value of a call option is the positive difference between the current price of the stock and the option price. The exercise value is zero if the stock's price is below the strike price.E) All of the above
F) A) and B)

Question 14

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

Accepted Answer

A)  GCC's stock price becomes more risky (higher variance) .
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 government takes actions that increase the risk-free rate.E) C) and D)
F) None of the above

Question 15

Which of the following statements is correct?

Accepted Answer

A)  Put options give investors the right to buy a stock at a certain strike price before a specified date.
B)  Call options give investors the right to sell a stock at a certain strike price before a specified date.
C)  LEAPS are very short-term options that were created relatively recently and now trade in the market.
D)  A call option holder is not entitled to receive dividends unless he or she exercises his or her option to buy the underlying shares.E) A) and D)
F) A) and C)

Question 16

Which of the following statements best describes options?

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)  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) B) and C)
F) C) and D)

Question 17

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) C) and D)
F) A) and B)

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 does NOT affect the value of an option,other things held constant?

Accepted Answer

A)  the strike price
B)  the variability of the stock price
C)  the option's time to maturity
D)  the stock betaE) B) and C)
F) None of the above

Question 20

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 3 months.Which statement regarding the value of these options is true?

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 Deeble's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.E) A) and D)
F) A) and B) D

Exam 19: Financial Options and Applications in Corporate Finance

Which of the following best describes an option contract in principle?

Correct Answer
verified

If the market is in equilibrium,then a call option contract 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

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Correct Answer
verified
C

Which best describes the strike price on an option contract?

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

Correct Answer
verified
C

Which term refers to an option that gives the holder the right to buy a stock at a specified price at some future time?

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

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

Which of the following statements is correct?

Correct Answer
verified

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.What will happen if the stock price increases 10%,to $22 a share?

Correct Answer
verified

The current price of a stock is $25,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $35 sells for $5.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Correct Answer
verified

Which of the following best describe the exercise value of a call option?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements best describes options?

Correct Answer
verified

Which of the following statements is correct?

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

Which of the following does NOT affect the value of an option,other things held constant?

Correct Answer
verified

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 3 months.Which statement regarding the value of these options is true?

Correct Answer
verified
D

Exam 19: Financial Options and Applications in Corporate Finance

Which of the following best describes an option contract in principle?

Correct AnswerverifiedShow Answer

If the market is in equilibrium,then a call option contract 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

Which term refers to the type of options sold by an investor who writes standard call options against stock held in his or her portfolio?

Correct AnswerverifiedC

Which best describes the strike price on an option contract?

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

Correct AnswerverifiedC

Which term refers to an option that gives the holder the right to buy a stock at a specified price at some future 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 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

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.What will happen if the stock price increases 10%,to $22 a share?

Correct AnswerverifiedShow Answer

The current price of a stock is $25,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $35 sells for $5.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Correct AnswerverifiedShow Answer

Which of the following best describe the exercise value of a call option?

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements best describes options?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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 does NOT affect the value of an option,other things held constant?

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 3 months.Which statement regarding the value of these options is true?

Correct AnswerverifiedD

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
D