Question 1

The value of a call option increases as the time to expiration increases because:

Accepted Answer

A) The exercise price continually decreases 
B) Opportunity increases to surpass exercise price 
C) Dividends accumulate while waiting to be paid 
D) The option can be repeatedly exercised 
A) The exercise price continually decreases 
B) Opportunity increases to surpass exercise price 
C) Dividends accumulate while waiting to be paid 
D) The option can be repeatedly exercised

Question 2

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 3

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price, exercise price, interest rate, time to expiration, volatility of stock price.

Accepted Answer

Stock price-direct relationship; the hol

Question 4

If you feel strongly that a stock price will move, but are unsure of the direction, you could buy the stock and:

Accepted Answer

A) Buy both a put and a call 
B) Sell both a put and a call 
C) Buy a put and sell a call 
D) Buy two puts 
A) Buy both a put and a call 
B) Sell both a put and a call 
C) Buy a put and sell a call 
D) Buy two puts

Question 5

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

Accepted Answer

A) ($14) 
B) ($10) 
C) $10 
D) $18 Value of put at expiration = exercise price - stock price
= $60 - 46
= $14
Total profit = value of put option - premium paid 
A) ($14) 
B) ($10) 
C) $10 
D) $18 Value of put at expiration = exercise price - stock price
= $60 - 46
= $14
Total profit = value of put option - premium paid

Question 6

Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put.

Accepted Answer

Buying a call: Max [(stock price - exerc

Question 7

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 8

The lower limit on value of a call option is:

Accepted Answer

A) Zero 
B) Less than zero 
C) Stock price minus exercise price 
D) Exercise price 
A) Zero 
B) Less than zero 
C) Stock price minus exercise price 
D) Exercise price

Question 9

Which is the best definition of a put 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 10

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

Accepted Answer

A) Buyer of a call option with exercise price of $65 
B) Buyer of a put option with exercise price of $65 
C) Buyer of a call option with exercise price of $80 
D) Buyer of a put option with exercise price of $85 
A) Buyer of a call option with exercise price of $65 
B) Buyer of a put option with exercise price of $65 
C) Buyer of a call option with exercise price of $80 
D) Buyer of a put option with exercise price of $85

Question 11

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share, then:

Accepted Answer

A) The bond will be converted immediately 
B) The bond is violating its "price floor" 
C) Conversion now would give the investor a profit of $900 
D) The conversion value of the bond is $900 
A) The bond will be converted immediately 
B) The bond is violating its "price floor" 
C) Conversion now would give the investor a profit of $900 
D) The conversion value of the bond is $900

Question 12

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 13

Three months back you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92, what is your return on investment?

Accepted Answer

A) 200 percent 
B) 150 percent 
C) 100 percent 
D) 50 percent Proceeds = Stock price - Exercise price
100 - 92 = $8
Profits = proceeds - original investment
= 8 - 4 = $4 
A) 200 percent 
B) 150 percent 
C) 100 percent 
D) 50 percent Proceeds = Stock price - Exercise price
100 - 92 = $8
Profits = proceeds - original investment
= 8 - 4 = $4

Question 14

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 15

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

Accepted Answer

A callable bond can be thought of as the

Question 16

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Accepted Answer

A) Less than $15 
B) Greater than $15 
C) Equal to $15 
D) Zero 
A) Less than $15 
B) Greater than $15 
C) Equal to $15 
D) Zero

Question 17

Which graph represents a selling a call option?

Accepted Answer

The answer of Which graph represents a selling a call...

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

As a stock's market price increases, the value of its call option will increase also.

Accepted Answer

A) True 
 B)False

Question 20

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

Accepted Answer

This package protects the investor from

Exam 25: Conclusion

The value of a call option increases as the time to expiration increases because:

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

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price, exercise price, interest rate, time to expiration, volatility of stock price.

If you feel strongly that a stock price will move, but are unsure of the direction, you could buy the stock and:

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put.

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

The lower limit on value of a call option is:

Which is the best definition of a put option?

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share, then:

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

Three months back you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92, what is your return on investment?

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

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

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Which graph represents a selling a call option?

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

As a stock's market price increases, the value of its call option will increase also.

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

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