Question 1

Consider the following equation: C = S - K + dis(K)+ P - PV(Div)
In this equation,dis(K)+ P - PV(Div)tells us:

Accepted Answer

A) the market value of the option. 
B) the difference in the price of an American option over a European option because of dividend capture. 
C) the intrinsic value of the option. 
D) the time value of the option. 
A) the market value of the option. 
B) the difference in the price of an American option over a European option because of dividend capture. 
C) the intrinsic value of the option. 
D) the time value of the option.

Question 2

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-You have decided to buy ten January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost and are these contracts in or out of the money?

Accepted Answer

If you buy 10 call option contracts you

Question 3

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called:

Accepted Answer

A) a strangle. 
B) portfolio insurance. 
C) a butterfly spread. 
D) a straddle. 
A) a strangle. 
B) portfolio insurance. 
C) a butterfly spread. 
D) a straddle.

Question 4

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-Assume it is now January of 2007 and the current risk-free interest rate is 1%.Using Put-Call Parity and the January 30 option (ask price),estimate the relative contribution of the near-term dividends to the value of Merck's stock.

Accepted Answer

A) $0.54 
B) $2.35 
C) $4.30 
D) $20.19 
A) $0.54 
B) $2.35 
C) $4.30 
D) $20.19

Question 5

The market price of an option is called the:

Accepted Answer

A) American premium. 
B) European premium. 
C) option premium. 
D) exercising premium. 
A) American premium. 
B) European premium. 
C) option premium. 
D) exercising premium.

Question 6

Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Luther with a strike price of $45.

Accepted Answer

C = P + S - PV(K)- P

Question 7

The holder of a put option has:

Accepted Answer

A) the obligation to sell a security for a given price. 
B) the right to buy a security for a given price. 
C) the right to sell a security for a given price. 
D) the obligation to buy a security for a given price. 
A) the obligation to sell a security for a given price. 
B) the right to buy a security for a given price. 
C) the right to sell a security for a given price. 
D) the obligation to buy a security for a given price.

Question 8

Describe the conditions when it would be optimal to exercise an American call and an American put option prior to their expiration.

Accepted Answer

One might surmise that the ability to ex

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) An option holder would not exercise an in-the-money option. 
B) The option seller,also called the option writer,sells (or writes)the option and has a short position in the contract. 
C) Because the long side of an option contract has the option to exercise,the short side has an obligation to fulfill the contract. 
D) When the exercise price of an option is equal to the current price of the stock,the option is said to be at-the-money. 
A) An option holder would not exercise an in-the-money option. 
B) The option seller,also called the option writer,sells (or writes)the option and has a short position in the contract. 
C) Because the long side of an option contract has the option to exercise,the short side has an obligation to fulfill the contract. 
D) When the exercise price of an option is equal to the current price of the stock,the option is said to be at-the-money.

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) A call option gives the owner the right to buy the asset. 
B) A put option gives the owner the right to sell the asset. 
C) A financial option contract gives the writer the right (but not the obligation)to purchase or sell an asset at a fixed price at some future date. 
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price. 
A) A call option gives the owner the right to buy the asset. 
B) A put option gives the owner the right to sell the asset. 
C) A financial option contract gives the writer the right (but not the obligation)to purchase or sell an asset at a fixed price at some future date. 
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.

Question 11

KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:

Accepted Answer

A) $0. 
B) -$2. 
C) $2. 
D) $30. 
A) $0. 
B) -$2. 
C) $2. 
D) $30.

Question 12

Using options to place a bet on the direction in which you believe the market is likely to move is called:

Accepted Answer

A) speculation. 
B) hedging. 
C) a covered position. 
D) a naked position. 
A) speculation. 
B) hedging. 
C) a covered position. 
D) a naked position.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) Options allow investors to speculate,or place a bet on the direction in which they believe the market is likely to move. 
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C) Call options with strike prices above the current stock price are in-the-money,as are put options with strike prices below the current stock price. 
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date. 
A) Options allow investors to speculate,or place a bet on the direction in which they believe the market is likely to move. 
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C) Call options with strike prices above the current stock price are in-the-money,as are put options with strike prices below the current stock price. 
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date.

Question 14

Using options to reduce risk is called:

Accepted Answer

A) speculation. 
B) a naked position. 
C) hedging. 
D) a covered position. 
A) speculation. 
B) a naked position. 
C) hedging. 
D) a covered position.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance,equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets,equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets. 
A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance,equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets,equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) Because a short position in an option is the other side of a long position,the profits from a short position in an option are just the negative of the profits of a long position. 
B) The deeper out-of-the-money the put option is,the less negative its beta,and the higher is its expected return. 
C) Although payouts on a long position in an option contract are never negative,the profit from purchasing an option and holding it to expiration could well be negative because the payout at expiration might be less than the initial cost of the option. 
D) The put position has a higher return in states with low stock prices;that is,if the stock has a positive beta,the put has a negative beta. 
A) Because a short position in an option is the other side of a long position,the profits from a short position in an option are just the negative of the profits of a long position. 
B) The deeper out-of-the-money the put option is,the less negative its beta,and the higher is its expected return. 
C) Although payouts on a long position in an option contract are never negative,the profit from purchasing an option and holding it to expiration could well be negative because the payout at expiration might be less than the initial cost of the option. 
D) The put position has a higher return in states with low stock prices;that is,if the stock has a positive beta,the put has a negative beta.

Question 17

Use the figure for the question(s)below.  
-This graph depicts the payoffs of:

Accepted Answer

A) a long position in a put option at expiration. 
B) a short position in a call option at expiration. 
C) a short position in a put option at expiration. 
D) a long position in a call option at expiration. 
A) a long position in a put option at expiration. 
B) a short position in a call option at expiration. 
C) a short position in a put option at expiration. 
D) a long position in a call option at expiration.

Exam 20: Financial Options

Consider the following equation: C = S - K + dis(K)+ P - PV(Div) In this equation,dis(K)+ P - PV(Div)tells us:

Use the table for the question(s)below. Consider the following information on options from the CBOE for Merck: -You have decided to buy ten January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost and are these contracts in or out of the money?

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called:

The market price of an option is called the:

The holder of a put option has:

Describe the conditions when it would be optimal to exercise an American call and an American put option prior to their expiration.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:

Using options to place a bet on the direction in which you believe the market is likely to move is called:

Which of the following statements is FALSE?

Using options to reduce risk is called:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the figure for the question(s)below. -This graph depicts the payoffs of:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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