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

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because (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 3

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) A) and D)
F) All of the above

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's stock price actually rises to $45, what would your pre-tax net profit be?

Accepted Answer

A)   -$310.25
B)   $1,689.75
C)   $1,774.24
D)   $1,862.95E) B) and D)
F) A) and D)

Question 6

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 7

What is an option that gives the holder the right to sell 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 C)

Question 8

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. 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, 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) B) and D)
F) A) and D)

Question 9

The current price of a stock is $22, and at the end of 1 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 binominal model, what is the option's value?

Accepted Answer

A)   $2.43
B)   $2.70
C)   $2.99
D)   $3.29E) A) and B)
F) All of the above

Question 10

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 11

The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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 14

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 15

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 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 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) None of the above D

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

Question 17

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

Question 18

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements best describes the options, other things held constant?

Accepted Answer

A)   The price of these call options is likely to rise if XYZ's stock price rises.
B)   The higher the strike price on XYZ's options, the higher the option's price will be.
C)   Assuming the same strike price, an XYZ call option that expires in 1 month will sell at a higher price than one that expires in 3 months.
D)   If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.E) B) and D)
F) A) and B)

Question 19

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

Accepted Answer

A)   the strike price
B)   the variability of the stock price
C)   the option's time to maturity
D)   the strike price; the variability of the stock price; and the option's time to maturityE) A) and B)
F) A) and C)

Question 20

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) D

Exam 19: 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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As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because (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
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Which of the following statements is correct?

Correct Answer
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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.

Correct Answer
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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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What is an option that gives the holder the right to sell a stock at a specified price at some future time?

Correct Answer
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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. Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct Answer
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The current price of a stock is $22, and at the end of 1 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 binominal model, what is the option's value?

Correct Answer
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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
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The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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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
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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
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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 of the following best describes the value of these options?

Correct Answer
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D

Which of the following statements best describes options?

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
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C

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements best describes the options, other things held constant?

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

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
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D

Exam 19: 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

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because (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

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

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

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. Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct AnswerverifiedShow Answer

The current price of a stock is $22, and at the end of 1 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 binominal model, what is the option's value?

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

The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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

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

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 of the following best describes the value of these options?

Correct AnswerverifiedD

Which of the following statements best describes options?

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 AnswerverifiedC

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements best describes the options, other things held constant?

Correct AnswerverifiedShow Answer

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

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 AnswerverifiedD

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D

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C

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D