Exam 8: Financial Options

Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share.If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?

Which of the following statements is CORRECT?

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 three months.Which of the following best describes the value of these options?

investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

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

we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.

exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

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?

current price of a stock is $22, and at the end of one 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?

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

exercise value 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.

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)• N(d2)N(d1) and N(d2) represent areas under a standard normal distribution function.Using the Black-Scholes model, what is the value of the call option?

options on XYZ Corporation's common stock trade in the market.Which of the following statements is most correct, holding other things constant?

Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options.Which of the following actions would decrease the value of the options, other things held constant?

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.

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

the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.