Question 1

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

Accepted Answer

A) The firm is in poor financial health. 
B) Interest rates have risen substantially since the bond was issued. 
C) Interest rates have fallen substantially since the bond was issued. 
D) The call option is ready to expire. 
A) The firm is in poor financial health. 
B) Interest rates have risen substantially since the bond was issued. 
C) Interest rates have fallen substantially since the bond was issued. 
D) The call option is ready to expire.

Question 2

Apply the Black-Scholes formula to the pricing of a 6-month call option with an exercise price of $85 on a stock with a current price of $85.The standard deviation of the annual stock return is 32%.The 6-month interest rate is 2.5%.

Accepted Answer

A) $8.64 
B) $8.98 
C) $7.18 
D) $6.45 
A) $8.64 
B) $8.98 
C) $7.18 
D) $6.45

Question 3

At what point on the graph of possible values for a call option does the buyer break even financially?

Accepted Answer

A) When stock price equals strike price. 
B) At any point on the upward-sloping segment of the graph. 
C) When stock price equals cost of the option plus strike price. 
D) At the point where the graph intercepts the y-axis. 
A) When stock price equals strike price. 
B) At any point on the upward-sloping segment of the graph. 
C) When stock price equals cost of the option plus strike price. 
D) At the point where the graph intercepts the y-axis.

Question 4

How does the price of a put option respond to an exercise price increase?

Accepted Answer

A) Increases 
B) Decreases 
C) Remains the same 
D) Goes to zero 
A) Increases 
B) Decreases 
C) Remains the same 
D) Goes to zero

Question 5

A writer of a call option expects the stock price to:

Accepted Answer

A) decrease. 
B) increase. 
C) remain unchanged. 
D) cash dividends quarterly. 
A) decrease. 
B) increase. 
C) remain unchanged. 
D) cash dividends quarterly.

Question 6

For each of the following option and securities combinations show what the payoff would be when the option expires.Assume that each option has the same exercise price and expiration date.
a.Buy a call and invest the present value of the exercise price in a bank deposit.
b.Buy a share and a put option on the share.
c.Buy a share, buy a put option on the share, and sell a call option on the share.
d.Buy a call option and a put option on the share.
Consider options with exercise price of $100.Call the stock price at the expiration date S.

Accepted Answer

The answer of For each of the following option and...

Question 7

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Accepted Answer

A) True 
 B)False

Question 8

Circular file stock is selling for $50 a share.You see that call options on the stock with an exercise price of $40 are selling at $6.What should you do? What will happen to the option price as investors identify this opportunity?

Accepted Answer

Buy call option for $6.Exercise the call

Question 9

Which of the following is true for the owner of a call option?

Accepted Answer

A) The loss potential is unlimited. 
B) The profit potential is unlimited. 
C) The premium exceeds the strike price. 
D) There is no expiration date, unless the option is a European call. 
A) The loss potential is unlimited. 
B) The profit potential is unlimited. 
C) The premium exceeds the strike price. 
D) There is no expiration date, unless the option is a European call.

Question 10

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Accepted Answer

Conversion Value = 15.5 × 70 = $1,085
Th

Question 11

Warrants are call options on a company's stock issued by an organized stock exchange.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is correct concerning callable bonds?

Accepted Answer

A) There is an upper bound on the bond's price. 
B) Their prices are higher than for straight bonds. 
C) Their attraction to the issuer increases as interest rates increase. 
D) The bond investor owns the call option. 
A) There is an upper bound on the bond's price. 
B) Their prices are higher than for straight bonds. 
C) Their attraction to the issuer increases as interest rates increase. 
D) The bond investor owns the call option.

Question 13

Investors who hold warrants essentially have a:

Accepted Answer

A) put option on the firm's bonds. 
B) put option on the firm's equity. 
C) call option on the firm's bonds. 
D) call option on the firm's equity. 
A) put option on the firm's bonds. 
B) put option on the firm's equity. 
C) call option on the firm's bonds. 
D) call option on the firm's equity.

Question 14

Which of the following call options would command the higher premium, other things equal?

Accepted Answer

A) October 2015 expiration, $45 strike price 
B) December 2015 expiration, $40 strike price 
C) March 2016 expiration, $45 strike price 
D) June 2016 expiration, $40 strike price 
A) October 2015 expiration, $45 strike price 
B) December 2015 expiration, $40 strike price 
C) March 2016 expiration, $45 strike price 
D) June 2016 expiration, $40 strike price

Question 15

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

Accepted Answer

A) Buyer of a call option with exercise price of $65. 
B) Buyer of a put option with exercise price of $65. 
C) Buyer of a call option with exercise price of $80. 
D) Buyer of a put option with exercise price of $85. 
A) Buyer of a call option with exercise price of $65. 
B) Buyer of a put option with exercise price of $65. 
C) Buyer of a call option with exercise price of $80. 
D) Buyer of a put option with exercise price of $85.

Question 16

It is May 19th and you own a June, European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

Accepted Answer

A) Exercise the option now and take the profits. 
B) Buy more options on ABC Corp. 
C) Sell your ABC stock before its price declines. 
D) Sit and wait until the June expiration. 
A) Exercise the option now and take the profits. 
B) Buy more options on ABC Corp. 
C) Sell your ABC stock before its price declines. 
D) Sit and wait until the June expiration.

Question 17

Determine the payoff and profits for a call option costing $24 with an exercise price of $160, and a stock price (at expiration) with a value of $195.

Accepted Answer

The answer of Determine the payoff and profits for a...

Question 18

Which graph represents a selling a put option?

Accepted Answer

The answer of Which graph represents a selling a put...

Question 19

The major difference between options on real assets and options on financial assets is that options on:

Accepted Answer

A) financial assets are costly. 
B) financial assets have a higher probability of positive payoff. 
C) real assets are implicit, rather than explicit. 
D) real assets are not influenced by price volatility. 
A) financial assets are costly. 
B) financial assets have a higher probability of positive payoff. 
C) real assets are implicit, rather than explicit. 
D) real assets are not influenced by price volatility.

Question 20

Which of the following is correct for the owner of a June call, valued at $3, on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Accepted Answer

A) XYZ is expected to go to $63 per share. 
B) The option cannot currently be exercised. 
C) The option owner's current profit is $3 per share. 
D) The option may expire without value. 
A) XYZ is expected to go to $63 per share. 
B) The option cannot currently be exercised. 
C) The option owner's current profit is $3 per share. 
D) The option may expire without value.

Exam 25: Options

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

Apply the Black-Scholes formula to the pricing of a 6-month call option with an exercise price of $85 on a stock with a current price of $85.The standard deviation of the annual stock return is 32%.The 6-month interest rate is 2.5%.

At what point on the graph of possible values for a call option does the buyer break even financially?

How does the price of a put option respond to an exercise price increase?

A writer of a call option expects the stock price to:

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Circular file stock is selling for $50 a share.You see that call options on the stock with an exercise price of $40 are selling at $6.What should you do? What will happen to the option price as investors identify this opportunity?

Which of the following is true for the owner of a call option?

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Warrants are call options on a company's stock issued by an organized stock exchange.

Which of the following is correct concerning callable bonds?

Investors who hold warrants essentially have a:

Which of the following call options would command the higher premium, other things equal?

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

It is May 19th and you own a June, European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

Determine the payoff and profits for a call option costing $24 with an exercise price of $160, and a stock price (at expiration) with a value of $195.

Which graph represents a selling a put option?

The major difference between options on real assets and options on financial assets is that options on:

Which of the following is correct for the owner of a June call, valued at $3, on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

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