Question 1

Benny's is reviewing a $462,000 project that is expected to increase the firm's equity by $141,300 What is the project's delta?

Accepted Answer

A) 0.2889 
B) 0.3058 
C) 0.2948 
D) 0.3103 
E) 0.2701 
A) 0.2889 
B) 0.3058 
C) 0.2948 
D) 0.3103 
E) 0.2701

Question 2

Pure Aqua stock is selling for $37.28 a share.One $37.50 call is valued at $1.02 and one $35 put is valued at $.13.What is the value of four call option contracts?

Accepted Answer

A) $4.08 
B) $2.96 
C) $296.00 
D) $408.00 
E) $0 
A) $4.08 
B) $2.96 
C) $296.00 
D) $408.00 
E) $0

Question 3

Which term applies to the purchase or sale of an underlying asset via an option contract?

Accepted Answer

A) Exercising the option 
B) Striking the price 
C) Opening the bid 
D) Splitting the security 
E) Expiring the option 
A) Exercising the option 
B) Striking the price 
C) Opening the bid 
D) Splitting the security 
E) Expiring the option

Question 4

You own an October 12 call and an October 12 put on SC stock.If the call finishes in the money,then the put will

Accepted Answer

A) also finish in the money. 
B) finish out of the money. 
C) finish at the money. 
D) either finish at the money or out of the money. 
E) either finish at the money or in the money. 
A) also finish in the money. 
B) finish out of the money. 
C) finish at the money. 
D) either finish at the money or out of the money. 
E) either finish at the money or in the money.

Question 5

Assume you own both a June 20 put and a June 20 call on ALPO stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

Accepted Answer

A) Both a May 20 put and a May 20 call on ALPO will have higher values than your June 20 options. 
B) An increase in the stock price will increase the value of your put and decrease the value of your call. 
C) A decrease in the stock price will decrease the value of both of your options. 
D) If put-call parity does not hold,you can profit from your positions even if ALPO stock sells for $20 a share. 
E) The time premium on your June 20 put is equal to the time premium on a July 20 put on ALPO. 
A) Both a May 20 put and a May 20 call on ALPO will have higher values than your June 20 options. 
B) An increase in the stock price will increase the value of your put and decrease the value of your call. 
C) A decrease in the stock price will decrease the value of both of your options. 
D) If put-call parity does not hold,you can profit from your positions even if ALPO stock sells for $20 a share. 
E) The time premium on your June 20 put is equal to the time premium on a July 20 put on ALPO.

Question 6

A ________ is a derivative security that grants the owner the right,but not the obligation,to buy an asset at a fixed price during a specified period of time.

Accepted Answer

A) call option 
B) futures contract 
C) put option 
D) swap 
E) forward contract 
A) call option 
B) futures contract 
C) put option 
D) swap 
E) forward contract

Question 7

An ________ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price on the expiration date.

Accepted Answer

A) American call option 
B) European put option 
C) American put option 
D) Euro-American swap 
E) European call option 
A) American call option 
B) European put option 
C) American put option 
D) Euro-American swap 
E) European call option

Question 8

You can realize the same value as that derived from stock ownership if you

Accepted Answer

A) sell a put option and invest at the risk-free rate of return. 
B) sell a put and buy a call on the stock as well as invest at the risk-free rate of return. 
C) buy a call option and write a put option on a stock and also lend out funds at the risk-free rate. 
D) lend out funds at the risk-free rate of return and sell a put option on the stock. 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options. 
A) sell a put option and invest at the risk-free rate of return. 
B) sell a put and buy a call on the stock as well as invest at the risk-free rate of return. 
C) buy a call option and write a put option on a stock and also lend out funds at the risk-free rate. 
D) lend out funds at the risk-free rate of return and sell a put option on the stock. 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

Question 9

You sold a $25 put contract on EDF stock at an option price of $1.10.What does the stock price have to be for you to break even on this contract?

Accepted Answer

A) $25.00 
B) $23.90 
C) $1.10 
D) $26.10 
E) $0 
A) $25.00 
B) $23.90 
C) $1.10 
D) $26.10 
E) $0

Question 10

If a call has a positive intrinsic value at expiration,the call is said to be

Accepted Answer

A) at the money. 
B) out of the money. 
C) in the money. 
D) funded. 
E) unfunded. 
A) at the money. 
B) out of the money. 
C) in the money. 
D) funded. 
E) unfunded.

Question 11

The value of an option if it were to immediately expire is called the option's ________ value.

Accepted Answer

A) strike 
B) time 
C) intrinsic 
D) volatility 
E) market 
A) strike 
B) time 
C) intrinsic 
D) volatility 
E) market

Question 12

Which variable within the Black-Scholes option pricing formula is the delta?

Accepted Answer

A) S 
B) e−Rt 
C) N(d2) 
D) N(d1) 
E) E 
A) S 
B) e−Rt 
C) N(d2) 
D) N(d1) 
E) E

Question 13

The intrinsic value of a call is
I.the value of the call if it were to expire today.
II.equal to the lower bound of a call's value.
III.another name for the market price of a call.
IV.always equal to zero if the call is currently out of the money.

Accepted Answer

A) I and III only 
B) II and IV only 
C) I and II only 
D) II,III,and IV only 
E) I,II,and IV only 
A) I and III only 
B) II and IV only 
C) I and II only 
D) II,III,and IV only 
E) I,II,and IV only

Question 14

Which one of the Black-Scholes formula parameters must be estimated?

Accepted Answer

A) Stock price 
B) Interest rate 
C) Time to expiration 
D) Variance of the return 
E) Exercise price 
A) Stock price 
B) Interest rate 
C) Time to expiration 
D) Variance of the return 
E) Exercise price

Question 15

Which one of the following statements correctly describes your situation as the owner of an American call option?

Accepted Answer

A) You are obligated to buy at a set price at any time up to and including the expiration date. 
B) You have the right to sell at a set price at any time up to and including the expiration date. 
C) You have the right to buy at a set price only on the expiration date. 
D) You are obligated to sell at a set price if the option is exercised. 
E) You have the right to buy at a set price at any time up to and including the expiration date. 
A) You are obligated to buy at a set price at any time up to and including the expiration date. 
B) You have the right to sell at a set price at any time up to and including the expiration date. 
C) You have the right to buy at a set price only on the expiration date. 
D) You are obligated to sell at a set price if the option is exercised. 
E) You have the right to buy at a set price at any time up to and including the expiration date.

Question 16

Robotic stock is selling for $68.90 a share.One $50 call contract is valued at $19.05,and one $65 put contract is valued at $0.72.What is the per share intrinsic value of the put?

Accepted Answer

A) $0 
B) $.72 
C) $3.90 
D) $3.18 
E) $72.00 
A) $0 
B) $.72 
C) $3.90 
D) $3.18 
E) $72.00

Question 17

The maximum payoff to the seller of a call is

Accepted Answer

A) zero. 
B) equal to the stock price. 
C) equal to the exercise price. 
D) not quantifiable. 
E) unlimited. 
A) zero. 
B) equal to the stock price. 
C) equal to the exercise price. 
D) not quantifiable. 
E) unlimited.

Question 18

High Mountain has a stock price of $31 a share.The 6-month options have a strike price of $30.The risk-free rate is 3.1 percent and the standard deviation of returns is 26 percent.The value of d1 is 0.35459.What is the value of d2 as it is used in the Black-Scholes option pricing model?

Accepted Answer

A) 0.19091 
B) 0.23048 
C) 0.17176 
D) 0.19323 
E) 0.17074 
A) 0.19091 
B) 0.23048 
C) 0.17176 
D) 0.19323 
E) 0.17074

Question 19

Which one of the following will cause the value of a call to decrease?

Accepted Answer

A) Lowering the risk level of the underlying security 
B) Increasing the time to expiration 
C) Increasing the risk-free rate 
D) Lowering the exercise price 
E) Increasing the stock price 
A) Lowering the risk level of the underlying security 
B) Increasing the time to expiration 
C) Increasing the risk-free rate 
D) Lowering the exercise price 
E) Increasing the stock price

Question 20

Hilltop stock has a current market price of $58.10 a share.The 1-year $55 call is priced at $3.75 while the 1-year $55 put is priced at $.42.What is the risk-free rate of return?

Accepted Answer

A) .42% 
B) .87% 
C) .48% 
D) .76% 
E) 1.09% 
A) .42% 
B) .87% 
C) .48% 
D) .76% 
E) 1.09%

Exam 17: Options and Corporate Finance

Benny's is reviewing a $462,000 project that is expected to increase the firm's equity by $141,300 What is the project's delta?

Pure Aqua stock is selling for $37.28 a share.One $37.50 call is valued at $1.02 and one $35 put is valued at $.13.What is the value of four call option contracts?

Which term applies to the purchase or sale of an underlying asset via an option contract?

You own an October 12 call and an October 12 put on SC stock.If the call finishes in the money,then the put will

Assume you own both a June 20 put and a June 20 call on ALPO stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

A ________ is a derivative security that grants the owner the right,but not the obligation,to buy an asset at a fixed price during a specified period of time.

An ________ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price on the expiration date.

You can realize the same value as that derived from stock ownership if you

You sold a $25 put contract on EDF stock at an option price of $1.10.What does the stock price have to be for you to break even on this contract?

If a call has a positive intrinsic value at expiration,the call is said to be

The value of an option if it were to immediately expire is called the option's ________ value.

Which variable within the Black-Scholes option pricing formula is the delta?

The intrinsic value of a call is I.the value of the call if it were to expire today. II.equal to the lower bound of a call's value. III.another name for the market price of a call. IV.always equal to zero if the call is currently out of the money.

Which one of the Black-Scholes formula parameters must be estimated?

Which one of the following statements correctly describes your situation as the owner of an American call option?

Robotic stock is selling for $68.90 a share.One $50 call contract is valued at $19.05,and one $65 put contract is valued at $0.72.What is the per share intrinsic value of the put?

The maximum payoff to the seller of a call is

High Mountain has a stock price of $31 a share.The 6-month options have a strike price of $30.The risk-free rate is 3.1 percent and the standard deviation of returns is 26 percent.The value of d1 is 0.35459.What is the value of d2 as it is used in the Black-Scholes option pricing model?

Which one of the following will cause the value of a call to decrease?

Hilltop stock has a current market price of $58.10 a share.The 1-year $55 call is priced at $3.75 while the 1-year $55 put is priced at $.42.What is the risk-free rate of return?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

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High Mountain has a stock price of $31 a share.The 6-month options have a strike price of $30.The risk-free rate is 3.1 percent and the standard deviation of returns is 26 percent.The value of d₁ is 0.35459.What is the value of d₂ as it is used in the Black-Scholes option pricing model?