Exam 8: Financial Options and Applications in Corporate Finance

An 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.

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60,what would your pre-tax net profit be?

Which of the following statements is CORRECT?

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

If 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.

Which of the following statements is CORRECT?

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Which of the following statements is CORRECT?

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

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

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

As 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.

If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price),then we would expect the premium to increase as the stock price increases,other things held constant.

Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?

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.

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

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

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?