Question 1

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 A

Question 2

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 B

Question 3

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

Accepted Answer

The depositor has in effect purchased a put option from the bank.To hedge, the bank should purchase puts to offset the exposure of the puts implicitly sold.

Question 4

What options may be present in capital investment proposals?

Accepted Answer

The importance of building flexibility i

Question 5

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Which of the following statements is correct for an investor who has purchased "portfolio insurance," by owning the stock and buying a put option on the stock?

Accepted Answer

A) The investor profits when the stock price declines 
B) Maximum profitability occurs when stock price equals strike price 
C) Value per share can decline no further than the strike price less the value of the option premium 
D) The option will certainly be exercised 
A) The investor profits when the stock price declines 
B) Maximum profitability occurs when stock price equals strike price 
C) Value per share can decline no further than the strike price less the value of the option premium 
D) The option will certainly be exercised

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

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 10

Assume that a share of stock is currently selling for $80, that a call option can be purchased for an $8 premium and an exercise price of $80, and that a put option can be purchased for a $4 premium and an exercise price of $80.If the investor buys one share, one call, and one put option, what type of price movements will be desirable? Illustrate the investor's potential profits.

Accepted Answer

If the likelihood of upward or downward

Question 11

How, in general, is value derived from options on real assets?

Accepted Answer

When the flexibility is retained in capi

Question 12

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.

Accepted Answer

Consider options with exercise

Question 13

The conversion ratio for a convertible bond equals the:

Accepted Answer

A) Ratio of bond value to stock price at conversion 
B) Number of bonds necessary to convert into one share of stock 
C) Number of shares of stock that can be exchanged for one bond 
D) Floor value beneath which the bond price cannot fall 
A) Ratio of bond value to stock price at conversion 
B) Number of bonds necessary to convert into one share of stock 
C) Number of shares of stock that can be exchanged for one bond 
D) Floor value beneath which the bond price cannot fall

Question 14

Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65.Also assume that the price of the middle call were the average of the other two calls.Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero.What can you deduce from this example about option pricing?

Accepted Answer

Let X denote the exercise price: @#IMG-DLM& Notice

Question 15

The payoffs from investing in options are designed so that:

Accepted Answer

A) Both buyers and sellers can profit 
B) The seller's (buyer's) gain is the buyer's (seller's) loss 
C) Roughly 20% of sellers and 50% of buyers profit 
D) Few buyers or sellers profit; they buy "insurance" 
A) Both buyers and sellers can profit 
B) The seller's (buyer's) gain is the buyer's (seller's) loss 
C) Roughly 20% of sellers and 50% of buyers profit 
D) Few buyers or sellers profit; they buy "insurance"

Question 16

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

Question 17

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 18

What is the option buyer's total profit or loss per share if a call option is purchased for a $5 premium, has a $50 exercise price, and the stock is valued at $53 at expiration?

Accepted Answer

A) ($5) 
B) ($2) 
C) $3 
D) $8 Value of call option = stock price - exercise price
Total profit of call = value of call option - premium paid
Then:
Value of call option = $53 - 50 = $3 
A) ($5) 
B) ($2) 
C) $3 
D) $8 Value of call option = stock price - exercise price
Total profit of call = value of call option - premium paid
Then:
Value of call option = $53 - 50 = $3

Question 19

Under which condition does a call option approach its upper bound?

Accepted Answer

A) When the stock price is far above the strike price 
B) When the stock price is closest to the strike price 
C) When the stock price is approaching zero 
D) When the option is approaching its expiration time 
A) When the stock price is far above the strike price 
B) When the stock price is closest to the strike price 
C) When the stock price is approaching zero 
D) When the option is approaching its expiration time

Question 20

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

Exam 25: Conclusion

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:

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):

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

What options may be present in capital investment proposals?

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

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

Which of the following statements is correct for an investor who has purchased "portfolio insurance," by owning the stock and buying a put option on the stock?

Which is the best definition of a call option?

Adding warrants as a 'sweetener' to bonds will:

How, in general, is value derived from options on real assets?

The conversion ratio for a convertible bond equals the:

The payoffs from investing in options are designed so that:

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

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

What is the option buyer's total profit or loss per share if a call option is purchased for a $5 premium, has a $50 exercise price, and the stock is valued at $53 at expiration?

Under which condition does a call option approach its upper bound?

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

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