Question 1

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Accepted Answer

A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 2

Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Put options give investors the right to buy a stock at a certain exercise price before a specified date. 
B)  Call options give investors the right to sell a stock at a certain exercise price before a specified date. 
C)  Options typically sell for less than their exercise value. 
D)  LEAPS are very short-term options that have begun trading on the exchanges in recent years. 
E)  Option holders are not entitled to receive dividends unless they choose to exercise their option. 
A)  Put options give investors the right to buy a stock at a certain exercise price before a specified date. 
B)  Call options give investors the right to sell a stock at a certain exercise price before a specified date. 
C)  Options typically sell for less than their exercise value. 
D)  LEAPS are very short-term options that have begun trading on the exchanges in recent years. 
E)  Option holders are not entitled to receive dividends unless they choose to exercise their option.

Question 4

Lissa Co.'s stock price is currently $30.00.A 6-month call option on Lissa's stock has a strike price of $25.75 and has an expected volatility of 40% (i.e. ,expected standard deviation = 40%).The risk-free rate is 6%.According to the Black-Scholes option pricing model,what is the value of the option? Do not round your intermediate calculations.

Accepted Answer

A)  $5.16 
B)  $6.46 
C)  $7.21 
D)  $6.22 
E)  $5.66 
A)  $5.16 
B)  $6.46 
C)  $7.21 
D)  $6.22 
E)  $5.66

Question 5

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

Accepted Answer

A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 6

The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

Accepted Answer

A) True 
 B)False

Question 7

Suppose a hypothetical CBOT 13-year U.S. ,semiannual payment,6% coupon Treasury note futures contract has a quoted price of 103-180.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,round the new interest rate to 4 decimal places when written as a decimal,and round the change in price up to the nearest whole dollar. )Do not round other intermediate calculations.
?

Accepted Answer

A)  ?$111 
B)  ?$94 
C)  ?$85 
D)  ?$71 
E)  ?$89 
A)  ?$111 
B)  ?$94 
C)  ?$85 
D)  ?$71 
E)  ?$89

Question 8

A riskless hedge can best be defined as

Accepted Answer

A)  A situation in which aggregate risk can be reduced by derivatives transactions between two parties. 
B)  A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. 
C)  Standardized contracts that are traded on exchanges and are "marked to market" daily,but where physical delivery of the underlying asset is virtually never taken. 
D)  Two parties agree to exchange obligations to make specified payment streams. 
E)  Simultaneously buying and selling a call option with the same exercise price. 
A)  A situation in which aggregate risk can be reduced by derivatives transactions between two parties. 
B)  A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. 
C)  Standardized contracts that are traded on exchanges and are "marked to market" daily,but where physical delivery of the underlying asset is virtually never taken. 
D)  Two parties agree to exchange obligations to make specified payment streams. 
E)  Simultaneously buying and selling a call option with the same exercise price.

Question 9

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Accepted Answer

A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 10

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

Accepted Answer

A)  If Deeble's stock price rose by $5,the exercise value of the options with the $25 exercise price would also increase by $5. 
B)  The options with the $25 exercise price will sell for less than the options with the $35 exercise price. 
C)  The options with the $25 exercise price have an exercise value greater than $5. 
D)  The options with the $35 exercise price have an exercise value greater than $0. 
E)  The options with the $25 exercise price will sell for $5. 
A)  If Deeble's stock price rose by $5,the exercise value of the options with the $25 exercise price would also increase by $5. 
B)  The options with the $25 exercise price will sell for less than the options with the $35 exercise price. 
C)  The options with the $25 exercise price have an exercise value greater than $5. 
D)  The options with the $35 exercise price have an exercise value greater than $0. 
E)  The options with the $25 exercise price will sell for $5.

Question 11

The value of a stock option depends on all of the following EXCEPT:

Accepted Answer

A)  Exercise price. 
B)  Variability of the stock price. 
C)  Length of time until option expiration. 
D)  Risk-free rate of interest. 
E)  Bond price. 
A)  Exercise price. 
B)  Variability of the stock price. 
C)  Length of time until option expiration. 
D)  Risk-free rate of interest. 
E)  Bond price.

Question 12

Suppose a hypothetical CBOT 12-year U.S. ,semiannual payment,7% coupon Treasury note futures contract has a quoted price of 103-180.If the note has a $1,000 par value,what is the implied annual interest rate inherent in the futures contract? Do not round your intermediate calculations.
?

Accepted Answer

A)  6.43% 
B)  5.25% 
C)  5.12% 
D)  6.56% 
E)  7.15% 
A)  6.43% 
B)  5.25% 
C)  5.12% 
D)  6.56% 
E)  7.15%

Question 13

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  An increase in GCC's stock price. 
B)  An increase in the exercise price of the option. 
C)  An increase in the amount of time until the option expires. 
D)  An increase in the risk-free rate. 
E)  GCC's stock price becomes more risky (higher variance). 
A)  An increase in GCC's stock price. 
B)  An increase in the exercise price of the option. 
C)  An increase in the amount of time until the option expires. 
D)  An increase in the risk-free rate. 
E)  GCC's stock price becomes more risky (higher variance).

Question 15

A 6-month put option on Makler Corp.'s stock has a strike price of $50.00 and sells in the market for $8.50.Makler's current stock price is $39.00.What is the exercise value of the option? Do not round your intermediate calculations.

Accepted Answer

A)  $8.36 
B)  $8.25 
C)  $12.32 
D)  $12.98 
E)  $11.00 
A)  $8.36 
B)  $8.25 
C)  $12.32 
D)  $12.98 
E)  $11.00

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Which of the following statements is CORRECT?

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

The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

A riskless hedge can best be defined as

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

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

The value of a stock option depends on all of the following EXCEPT:

Suppose a hypothetical CBOT 12-year U.S. ,semiannual payment,7% coupon Treasury note futures contract has a quoted price of 103-180.If the note has a $1,000 par value,what is the implied annual interest rate inherent in the futures contract? Do not round your intermediate calculations. ?

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

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

A 6-month put option on Makler Corp.'s stock has a strike price of $50.00 and sells in the market for $8.50.Makler's current stock price is $39.00.What is the exercise value of the option? Do not round your intermediate calculations.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 18: Derivatives and Risk Management

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Which of the following statements is CORRECT?

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

The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

A riskless hedge can best be defined as

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

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

The value of a stock option depends on all of the following EXCEPT:

Suppose a hypothetical CBOT 12-year U.S. ,semiannual payment,7% coupon Treasury note futures contract has a quoted price of 103-180.If the note has a $1,000 par value,what is the implied annual interest rate inherent in the futures contract? Do not round your intermediate calculations. ?

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

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

A 6-month put option on Makler Corp.'s stock has a strike price of $50.00 and sells in the market for $8.50.Makler's current stock price is $39.00.What is the exercise value of the option? Do not round your intermediate calculations.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters