Exam 25: Option Valuation

Use the information below to answer the following question. Assume a stock price of $42; a risk-free rate of 3.5 percent per year, compounded continuously; a six-month maturity; and a standard deviation of 64 percent per year. If a six-month call with an exercise price of $45 is priced at $6.66, what is the price of the six-month $45 put?

Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free rate of 2.40 percent, standard deviation of 57 percent, and a d₁ value of .27167. What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Which one of the five factors included in the Black-Scholes option pricing model cannot be directly observed?

A purely financial merger:

Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum total amount you can lose over the next year on these purchases?

A firm has assets of $16.4 million and 2-year, zero-coupon, risky bonds with a total face value of $7.4 million. The bonds have a total current market value of $7.1 million. The shareholders of this firm can change these risky bonds into risk-free bonds by purchasing a ________ option with a 2-year life and a strike price of ________ million.

A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45?

Use the information below to answer the following question. Upside Down has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $12,400 while the standard deviation of the returns on those assets is 22 percent annually. The annual risk-free rate is 4.6 percent, compounded continuously. What is the market value of the firm's debt based on the Black-Scholes model?

A put option that expires in eight months with an exercise price of $55 sells for $7.34. The stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded continuously. What is the price of a call option with the same exercise price and expiration date?

All of the following affect the value of a call option except the:

If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to?

Selling a call option is generally more valuable than exercising the option because of the option's:

Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(d₁) value of .62789, and an N(d₂) value of .54232. What is the value of a 3-month call option with a strike price of $30 given the Black-Scholes option pricing model?

Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to this strategy?

The primary purpose of a protective put is to:

Use the information below to answer the following question. S&C Co. has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm's assets is $23,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. What is the firm's continuously compounded cost of debt?

The value of an option is equal to the:

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now?

Purely financial mergers: