Exam 8: Financial Options

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.

Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.

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.

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

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

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?

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?

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.