Question 1

Which of the following statements is most correct,holding other things constant,for XYZ Corporation's traded call options?

Accepted Answer

A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises. 
A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises.

Question 2

The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.

Accepted Answer

A) True 
 B)False

Question 3

The current price of a stock is $22,and at the end of one year its price will be either $27 or $17.The annual risk-free rate is 6.0%,based on daily compounding.A 1-year call option on the stock,with an exercise price of $22,is available.Based on the binomial model,what is the option's value? (Hint: Use daily compounding.)

Accepted Answer

A)  $2.43 
B)  $2.70 
C)  $2.99 
D)  $3.29 
E)  $3.62 
A)  $2.43 
B)  $2.70 
C)  $2.99 
D)  $3.29 
E)  $3.62

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B)  Options typically sell for less than their exercise value. 
C)  LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D)  An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E)  Put options give investors the right to buy a stock at a certain strike price before a specified date. 
A)  Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B)  Options typically sell for less than their exercise value. 
C)  LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D)  An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E)  Put options give investors the right to buy a stock at a certain strike price before a specified date.

Question 5

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

Accepted Answer

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

Question 6

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

Accepted Answer

A)  The price of the call option will increase by more than $2. 
B)  The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C)  The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D)  The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E)  The price of the call option will increase by $2. 
A)  The price of the call option will increase by more than $2. 
B)  The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C)  The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D)  The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E)  The price of the call option will increase by $2.

Question 7

An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
•The price of the stock is $40.
•The strike price of the option 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%.
Given this information,the analyst then calculated the following necessary components of the Black-Scholes model:
•d? = 0.175
•d? = 0.025
•N(d?)= 0.56946
•N(d?)= 0.49003
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?

Accepted Answer

A)  $2.81 
B)  $3.12 
C)  $3.47 
D)  $3.82 
E)  $4.20 
A)  $2.81 
B)  $3.12 
C)  $3.47 
D)  $3.82 
E)  $4.20

Question 8

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Accepted Answer

A)  $7.33 
B)  $7.71 
C)  $8.12 
D)  $8.55 
E)  $9.00 
A)  $7.33 
B)  $7.71 
C)  $8.12 
D)  $8.55 
E)  $9.00

Which of the following statements is most correct,holding other things constant,for XYZ Corporation's traded call options?

The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.

Which of the following statements is CORRECT?

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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Exam 8: Financial Options and Applications in Corporate Finance

Which of the following statements is most correct,holding other things constant,for XYZ Corporation's traded call options?

The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.

Which of the following statements is CORRECT?

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters