Exam 23: Options

The Financial Accounting Standards Board (FASB) requires that companies recognize the fact that employee stock options are valuable and therefore are an expense just like salaries and wages.

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

A share of stock is currently selling for $80. The $80 call option is priced at $8 and the $80 put option is priced at $4. Assume an investor buys one share, one call, and one put option. What is the net profit for this strategy at expiration day stock prices of $0, $50, $80, $86, and $110? Define in words the maximum potential loss and the maximum potential gain for this strategy. What value does the put add to this strategy? What value does the call add?

The value of a callable bond equals the value of a straight bond:

If you sell a put option, your maximum profit potential is equal to:

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

What is the minimum value of the call option on a convertible bond (with face value of $1,000) 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.

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

A call option will have the highest value when the stock price is:

Define the put-call parity relationship.

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

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?

Circular File stock is selling for $25 a share. You see that call options on the stock with an exercise price of $20 are selling at $3. What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with an exercise price $30 are selling for $4. What should you do?

A 10-year convertible bond with a 6% coupon is selling for $1,050. Each bond can be exchanged for 20 shares and the stock price currently is $49 per share. Other comparable bonds are selling at a yield to maturity of 8%. What is the value of the bondholders' call option? Why is the bond selling for more than its conversion value?

If a convertible bond can be thought of as a straight bond with a call option, then the call is owned by the _____, and the strike price is the _____.

The option to abandon a project investing in real assets can be considered to have a strike price equal to the:

A share of stock is currently priced at $20 and will change with equal likelihood to either $55 or $15. A call option with a $25 exercise price is available on the stock. You want to borrow funds to purchase the stock in order to replicate the call option. How many shares of stock must be purchased to replicate one call option?

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

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

Only at the expiration date can an investor expect to find the value of call options above their lower bound.