Exam 6: Financial Options

The current price of a stock is $22. In one year, the price will be either $27 or $17. The annual risk-free rate is 6 percent. What is the price of a call option on the stock that has an exercise price of $22 and that expires in one year, rounded to the nearest dollar? [Hint: use daily compounding.]

The value of an option depends on the stock's price, the risk-free rate, and the

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

The current price of a stock is $50 and the annual risk-free rate is 6 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $7.20. What is the value of a put option (to the nearest dollar) written on the stock with the same exercise price and expiration date as the call option?

Deeble Construction Co.'s stock is trading at $30 a share. There are also call options on the company's stock, some with an exercise price of $25 and some with an exercise price of $35. All options expire in three months. Which of the following best describes the value of these options?

Warnes Motors' stock is trading at $20 a share. Call options that expire in three months with an exercise price of $20 have a price of $1.50. Which of the following will occur if the stock price increases 10 percent to $22 a share?

There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors affecting the value of these call options?

Which of the following statements is most correct?

An option is a contract which gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

An analyst is interested in using the Black-Scholes model to value call options on the stock of Ledbetter Inc. The analyst has accumulated the following information: • The price of the stock is $40. • The strike price 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 percent. Given this information, the analyst is then able to calculate some other 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?

An investor who writes call options against stock held in his or her portfolio is said to be selling ___________ options.

Suppose you believe that Du Pont'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 $83.00 per share. If you bought a 100-share contract for $510.25 and Du Pont's stock price actually dropped to $63.00, you would make

Which of the following statements is correct?

Which of the following statements is most correct?

An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

If the current price of a stock is below the strike (exercise) price and there is still time before expiration, there will not be a time value in the market price of a call option on the stock.

As the price of a stock rises, the time value investors are willing to pay for a call option increases because of the immediate capital gain that can be realized by exercising the option, and from the possibility that the stock price could go higher.

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

The strike price is different from the exercise price and deals with convertibles rather than with warrants.