Question 1

A protective put is a costless way of eliminating the downside risk if holding stock.

Accepted Answer

A) True 
 B)False

Question 2

On March 30 you are holding a call option on a stock (exercise price of $60),which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

Accepted Answer

A)  $1 
B)  ($1) 
C)  Very little 
D)  Zero 
A)  $1 
B)  ($1) 
C)  Very little 
D)  Zero

Question 3

What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?

Accepted Answer

A)  $90 per share profit 
B)  $10 per share profit 
C)  $0 per share profit (break-even) 
D)  Unlimited losses 
A)  $90 per share profit 
B)  $10 per share profit 
C)  $0 per share profit (break-even) 
D)  Unlimited losses

Question 4

Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is true for an investor that owns a share of stock and has purchased a put option on the stock?

Accepted Answer

A)  The investor profits when the stock decreases in value. 
B)  Maximum loss is the price of the option premium. 
C)  The investor is protected against upside potential. 
D)  Increases in stock value go to the seller of the put. 
A)  The investor profits when the stock decreases in value. 
B)  Maximum loss is the price of the option premium. 
C)  The investor is protected against upside potential. 
D)  Increases in stock value go to the seller of the put.

Question 6

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 7

When the stock price is very high compared to the exercise price,the call option premium approximates the difference between the stock price and strike price.

Accepted Answer

A) True 
 B)False

Question 8

Convertible bonds give the investor the option to buy the firm's stock in exchange for the value of the underlying bond.

Accepted Answer

A) True 
 B)False

Question 9

Firms spend an increasing amount of time evaluating real options,which are:

Accepted Answer

A)  options on real assets such as an option to abandon. 
B)  call and put options traded on organized exchanges. 
C)  call options such as warrants and convertible bonds. 
D)  put options such as held by shareholders of a firm with financial leverage. 
A)  options on real assets such as an option to abandon. 
B)  call and put options traded on organized exchanges. 
C)  call options such as warrants and convertible bonds. 
D)  put options such as held by shareholders of a firm with financial leverage.

Question 10

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

Accepted Answer

A)  (60%) 
B)  60% 
C)  30% 
D)  (30%) 
A)  (60%) 
B)  60% 
C)  30% 
D)  (30%)

Question 11

The difference between an American call option and a European call option is:

Accepted Answer

A)  the European call has a final exercise date. 
B)  the American call trades only on domestic stocks. 
C)  the European call can be exercised only on one day. 
D)  the American call generates profits regardless of which direction the stock moves. 
A)  the European call has a final exercise date. 
B)  the American call trades only on domestic stocks. 
C)  the European call can be exercised only on one day. 
D)  the American call generates profits regardless of which direction the stock moves.

Question 12

What options may be present in capital investment proposals?

Accepted Answer

The importance of building flexibility i

Question 13

What is a callable bond and how is its value determined?

Accepted Answer

A callable bond can be thought of as the

Question 14

It has been determined that 0.5 shares of stock should be purchased with borrowed funds to replicate the payoff to one call option.What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

Accepted Answer

A)  $40 
B)  $50 
C)  $60 
D)  $70 
A)  $40 
B)  $50 
C)  $60 
D)  $70

Question 15

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit <loss> per share if the option is exercised tomorrow?

Accepted Answer

A)  ($16) 
B)  ($8) 
C)  $8 
D)  $16 
A)  ($16) 
B)  ($8) 
C)  $8 
D)  $16

Question 16

Which of the following statements is correct?

Accepted Answer

A)  A convertible bond will be priced less than a similar callable bond. 
B)  A convertible bond will be priced more than a similar callable bond. 
C)  Similar callable and convertible bonds will have the same price. 
D)  Warrants are always priced more than convertible bonds. 
A)  A convertible bond will be priced less than a similar callable bond. 
B)  A convertible bond will be priced more than a similar callable bond. 
C)  Similar callable and convertible bonds will have the same price. 
D)  Warrants are always priced more than convertible bonds.

Question 17

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?

Accepted Answer

A)  $46 
B)  $50 
C)  $52 
D)  $54 
A)  $46 
B)  $50 
C)  $52 
D)  $54

Question 18

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

Accepted Answer

A)  When the stock price has declined below the strike price. 
B)  When the stock price has increased above the strike price. 
C)  The put buyer has an equal obligation regardless of the relationship between stock and strike prices. 
D)  The put buyer has no obligation whatsoever. 
A)  When the stock price has declined below the strike price. 
B)  When the stock price has increased above the strike price. 
C)  The put buyer has an equal obligation regardless of the relationship between stock and strike prices. 
D)  The put buyer has no obligation whatsoever.

Question 19

Which is the best definition of a warrant?

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 20

Which of the following changes will decrease the value of a call option?

Accepted Answer

A)  An increase in stock price. 
B)  An increase in strike price. 
C)  An increase in stock price volatility. 
D)  An increase in interest rates. 
A)  An increase in stock price. 
B)  An increase in strike price. 
C)  An increase in stock price volatility. 
D)  An increase in interest rates.

Exam 25: Options

A protective put is a costless way of eliminating the downside risk if holding stock.

On March 30 you are holding a call option on a stock (exercise price of $60),which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?

Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.

Which of the following is true for an investor that owns a share of stock and has purchased a put option on the stock?

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

When the stock price is very high compared to the exercise price,the call option premium approximates the difference between the stock price and strike price.

Convertible bonds give the investor the option to buy the firm's stock in exchange for the value of the underlying bond.

Firms spend an increasing amount of time evaluating real options,which are:

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

The difference between an American call option and a European call option is:

What options may be present in capital investment proposals?

What is a callable bond and how is its value determined?

It has been determined that 0.5 shares of stock should be purchased with borrowed funds to replicate the payoff to one call option.What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit <loss> per share if the option is exercised tomorrow?

Which of the following statements is correct?

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

Which is the best definition of a warrant?

Which of the following changes will decrease the value of a call option?

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

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