Question 1

If the volatility of the underlying asset decreases, then the

Accepted Answer

A) value of the put option will increase, but the value of the call option will decrease. 
B) value of the put option will decrease, but the value of the call option will increase. 
C) value of both the put and call option will increase. 
D) value of both the put and call option will decrease. 
A) value of the put option will increase, but the value of the call option will decrease. 
B) value of the put option will decrease, but the value of the call option will increase. 
C) value of both the put and call option will increase. 
D) value of both the put and call option will decrease.

Question 2

Explain the difference between a European option and an American option.

Accepted Answer

A European option may be exerc

Question 3

If you write a put option, you acquire the right to buy stock at a fixed strike price.

Accepted Answer

A) True 
 B)False

Question 4

An increase in the underlying stock price results in an increase in a call option's price.

Accepted Answer

A) True 
 B)False

Question 5

Put-call parity can be used to show

Accepted Answer

A) how valuable in-the-money put options can get. 
B) how valuable in-the-money call options can get. 
C) the precise relationship between put and call option prices, given equal exercise prices and equal expiration dates. 
D) that the value of a call option is always twice that of a put, given equal exercise prices and equal expiration dates. 
A) how valuable in-the-money put options can get. 
B) how valuable in-the-money call options can get. 
C) the precise relationship between put and call option prices, given equal exercise prices and equal expiration dates. 
D) that the value of a call option is always twice that of a put, given equal exercise prices and equal expiration dates.

Question 6

The writer (seller)of a regular exchange-listed call-option on a stock

Accepted Answer

A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price. 
A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Question 7

Define the term option.

Accepted Answer

An option is defined as a righ

Question 8

An investor, in practice, can buy
I.an option on a single share of stock
II.blocks of 100 options

Accepted Answer

A) I only 
B) II only 
C) Both I and II 
D) None of the options. 
A) I only 
B) II only 
C) Both I and II 
D) None of the options.

Question 9

Briefly discuss the usefulness of position diagrams.

Accepted Answer

Position diagrams show payoffs at option

Question 10

Position diagrams and profit diagrams are one and the same.

Accepted Answer

A) True 
 B)False

Question 11

Discuss the factors that determine the value of a call option.

Accepted Answer

The value of a call option is determined

Question 12

The value of a call option is positively related to the following:
I.underlying stock price;
II.risk-free rate;
III.time to expiration;
IV.volatility of the underlying stock price

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I, II, III, and IV 
A) I only 
B) II only 
C) III only 
D) I, II, III, and IV

Question 13

All else equal, options written on volatile assets are worth more than options written on safer assets.

Accepted Answer

A) True 
 B)False

Question 14

An investor can get downside protection on the purchase of stock by buying a put option.

Accepted Answer

A) True 
 B)False

Question 15

The value of a put option is positively related to the:
I.exercise price;
II.time to expiration;
III.volatility of the underlying stock price;
IV.risk-free rate

Accepted Answer

A) I, II, and III only 
B) II, III, and IV only 
C) I, II, and IV only 
D) IV only 
A) I, II, and III only 
B) II, III, and IV only 
C) I, II, and IV only 
D) IV only

Question 16

Figure 3 depicts the

Accepted Answer

A) position diagram for the writer (seller)of a call option. 
B) profit diagram for the writer (seller)of a call option. 
C) position diagram for the writer (seller)of a put option. 
D) profit diagram for the writer (seller)of a put option. 
A) position diagram for the writer (seller)of a call option. 
B) profit diagram for the writer (seller)of a call option. 
C) position diagram for the writer (seller)of a put option. 
D) profit diagram for the writer (seller)of a put option.

Exam 20: Understanding Options

If the volatility of the underlying asset decreases, then the

Explain the difference between a European option and an American option.

If you write a put option, you acquire the right to buy stock at a fixed strike price.

An increase in the underlying stock price results in an increase in a call option's price.

Put-call parity can be used to show

The writer (seller)of a regular exchange-listed call-option on a stock

Define the term option.

An investor, in practice, can buy I.an option on a single share of stock II.blocks of 100 options

Briefly discuss the usefulness of position diagrams.

Position diagrams and profit diagrams are one and the same.

Discuss the factors that determine the value of a call option.

The value of a call option is positively related to the following: I.underlying stock price; II.risk-free rate; III.time to expiration; IV.volatility of the underlying stock price

All else equal, options written on volatile assets are worth more than options written on safer assets.

An investor can get downside protection on the purchase of stock by buying a put option.

The value of a put option is positively related to the: I.exercise price; II.time to expiration; III.volatility of the underlying stock price; IV.risk-free rate

Figure 3 depicts the

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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