Question 1

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 A

Question 2

Which combination of positions will tend to protect the owner from downside risk?

Accepted Answer

A)  Buy the stock and buy a call option. 
B)  Sell the stock and buy a call option. 
C)  Buy the stock and buy a put option. 
D)  Buy the stock and sell a put option. 
A)  Buy the stock and buy a call option. 
B)  Sell the stock and buy a call option. 
C)  Buy the stock and buy a put option. 
D)  Buy the stock and sell a put option. C

Question 3

At expiration a put option will have no value if the stock price is greater than the exercise price.

Accepted Answer

A) True 
 B)False  True

Question 4

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 5

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 6

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

Accepted Answer

A)  ($20) 
B)  0 
C)  $10 
D)  $20 
A)  ($20) 
B)  0 
C)  $10 
D)  $20

Question 7

You paid $5 a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option and selling the stock will be:

Accepted Answer

A)  ($25). 
B)  $0. 
C)  $20. 
D)  $60. 
A)  ($25). 
B)  $0. 
C)  $20. 
D)  $60.

Question 8

Which is the best definition of a call option?

Accepted Answer

A)  The right to buy an asset at a fixed price during a particular time period. 
B)  The right to sell an asset at a fixed price during a particular time period. 
C)  A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time. 
D)  The act of buying or selling the underlying asset via the option contract. 
A)  The right to buy an asset at a fixed price during a particular time period. 
B)  The right to sell an asset at a fixed price during a particular time period. 
C)  A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time. 
D)  The act of buying or selling the underlying asset via the option contract.

Question 9

An investor can create a straddle position by doing the following:

Accepted Answer

A)  buy a stock and write a call option. 
B)  buy a stock and buy a call option. 
C)  buy a stock and buy a put option. 
D)  buy a call option and a put option with the same exercise price. 
A)  buy a stock and write a call option. 
B)  buy a stock and buy a call option. 
C)  buy a stock and buy a put option. 
D)  buy a call option and a put option with the same exercise price.

Question 10

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 11

Option buyers can have a(n)__________ of exercising their options.Options sellers can have a(n)__________ of exercising their options.

Accepted Answer

A)  Obligation; obligation 
B)  Obligation; right 
C)  Right; right 
D)  Right; obligation 
A)  Obligation; obligation 
B)  Obligation; right 
C)  Right; right 
D)  Right; obligation

Question 12

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

Accepted Answer

A)  put option. 
B)  call option. 
C)  option to expand. 
D)  it is not an option. 
A)  put option. 
B)  call option. 
C)  option to expand. 
D)  it is not an option.

Question 13

Stock options have been traded on exchanges since:

Accepted Answer

A)  the founding of the New York Stock Exchange. 
B)  options were discovered in 1946. 
C)  the early part of the 1970s. 
D)  just before the stock market crash in 1987. 
A)  the founding of the New York Stock Exchange. 
B)  options were discovered in 1946. 
C)  the early part of the 1970s. 
D)  just before the stock market crash in 1987.

Question 14

When the stock price has risen above the exercise price,the value of a call option is equal to the stock price:

Accepted Answer

A)  less the value of the dividend. 
B)  less the value of the option. 
C)  less the present value of the exercise price. 
D)  less the exercise price. 
A)  less the value of the dividend. 
B)  less the value of the option. 
C)  less the present value of the exercise price. 
D)  less the exercise price.

Question 15

What is the primary difference between an American and European option?

Accepted Answer

A)  The value at which the option can be exercised. 
B)  The number of options that can be exercised. 
C)  The time period when the option can be exercised. 
D)  The manner options are bought or sold. 
A)  The value at which the option can be exercised. 
B)  The number of options that can be exercised. 
C)  The time period when the option can be exercised. 
D)  The manner options are bought or sold.

Question 16

The holder of a convertible bond is required to convert the bond into stock at maturity.

Accepted Answer

A) True 
 B)False

Question 17

Stock price volatility is beneficial to option holders.

Accepted Answer

A) True 
 B)False

Question 18

Adding warrants as a 'sweetener' to bonds will:

Accepted Answer

A)  reduce the value of the bond. 
B)  increase the coupon rate of the bond. 
C)  increase the value of the bond. 
D)  make the bond more risky. 
A)  reduce the value of the bond. 
B)  increase the coupon rate of the bond. 
C)  increase the value of the bond. 
D)  make the bond more risky.

Question 19

What is the minimum value of the call option on a convertible bond with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

Accepted Answer

A)  $0 
B)  $5 
C)  $50 
D)  $65 
A)  $0 
B)  $5 
C)  $50 
D)  $65

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 25: Options

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

Which combination of positions will tend to protect the owner from downside risk?

At expiration a put option will have no value if the stock price is greater than the exercise price.

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?

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

You paid $5 a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option and selling the stock will be:

Which is the best definition of a call option?

An investor can create a straddle position by doing the following:

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?

Option buyers can have a(n)__________ of exercising their options.Options sellers can have a(n)__________ of exercising their options.

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

Stock options have been traded on exchanges since:

When the stock price has risen above the exercise price,the value of a call option is equal to the stock price:

What is the primary difference between an American and European option?

The holder of a convertible bond is required to convert the bond into stock at maturity.

Stock price volatility is beneficial to option holders.

Adding warrants as a 'sweetener' to bonds will:

What is the minimum value of the call option on a convertible bond with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

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

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Risk Management

Filters

It is May 19^th 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?

Option buyers can have a(n) of exercising their options.Options sellers can have a(n) of exercising their options.