Question 1

At what point is the payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

Accepted Answer

A)  When stock price exceeds strike price at expiration 
B)  When strike price exceeds stock price at expiration 
C)  When stock price equals strike price at expiration 
D) Call payoff never exceeds stock payoff. 
A)  When stock price exceeds strike price at expiration 
B)  When strike price exceeds stock price at expiration 
C)  When stock price equals strike price at expiration 
D) Call payoff never exceeds stock payoff.

Question 2

You purchased a stock for $36 a share, a call option with an exercise price of $35 and a premium of $3, and a put option with an exercise price of $35 and a premium of $2. What will be your net profit if you close out all three positions when the stock is selling for $37 a share?

Accepted Answer

A)  -$2 
B)  $3 
C)  -$1 
D) $2 
A)  -$2 
B)  $3 
C)  -$1 
D) $2

Question 3

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 4

Why would bondholders be willing to pay more for bonds that contain warrants?

Accepted Answer

A warrant offers an option to the bondho

Question 5

What is the profit per share for an investor who has purchased a share of stock for $42 and purchased a put option with an exercise price of $40 and a premium of $2 if the stock was valued at $30 at expiration?

Accepted Answer

A)  $6 
B)  -$6 
C)  -$4 
D) $4 
A)  $6 
B)  -$6 
C)  -$4 
D) $4

Question 6

What is the difference between an American call option and a European call option?

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 7

When does a change in the value of a call option come the closest to matching the price change in a share of stock?

Accepted Answer

A)  When the stock is priced far above the strike price 
B)  When the stock is priced far below the strike price 
C)  When the stock is priced near zero 
D) Changes in call value always come close to matching changes in stock price. 
A)  When the stock is priced far above the strike price 
B)  When the stock is priced far below the strike price 
C)  When the stock is priced near zero 
D) Changes in call value always come close to matching changes in stock price.

Question 8

A real estate developer buys 70 acres of land in a rural area, planning to build a subdivision on the land if and when the population from the city begins to expand into the area. If population growth is less than anticipated, the developer believes that the land can be sold to a country club that would build a golf course on the property.
a. In what way does the possibility of sale to the country club provide a put option to the developer?
b. What is the exercise price of the option? The asset value?
c. How does the golf course option increase the NPV of the land project to the developer?

Accepted Answer

a. The developer has the option to sell

Question 9

Which one of the following is correct for the owner of a September put, valued at $20, on CBA Corp. with a strike price of $80? CBA currently trades at $67.

Accepted Answer

A)  The option will continue to gain value until its September expiration. 
B)  The owner profits $13 per share by exercising now. 
C)  Further decreases in the CBA stock price will be translated directly into additional option value. 
D) $20 is the maximum value for this option. 
A)  The option will continue to gain value until its September expiration. 
B)  The owner profits $13 per share by exercising now. 
C)  Further decreases in the CBA stock price will be translated directly into additional option value. 
D) $20 is the maximum value for this option.

Question 10

Warrants do not expire.

Accepted Answer

A) True 
 B)False

Question 11

A stock is currently selling for $70 per share and its call option has an exercise price of $90. What is the lower limit on the value of the call option?

Accepted Answer

A)  -$20 
B)  $0 
C)  $10 
D) $20 
A)  -$20 
B)  $0 
C)  $10 
D) $20

Question 12

You purchased a call option with an exercise price of $50 and a premium of $6. If you exercise the option when the stock price is $60, your net proceeds will be:

Accepted Answer

A)  $4. 
B)  $0. 
C)  $10. 
D) $16. 
A)  $4. 
B)  $0. 
C)  $10. 
D) $16.

Question 13

Which one of the following conditions will typically be present when a firm calls a bond prior to maturity?

Accepted Answer

A)  The firm is in poor financial health. 
B)  Interest rates have risen substantially since the bond was issued. 
C)  Interest rates have fallen substantially since the bond was issued. 
D) The call option is ready to expire. 
A)  The firm is in poor financial health. 
B)  Interest rates have risen substantially since the bond was issued. 
C)  Interest rates have fallen substantially since the bond was issued. 
D) The call option is ready to expire.

Question 14

An increase in which one of the following will decrease the value of a call option?

Accepted Answer

A)  Interest rate 
B)  Time to expiration 
C)  Volatility of stock price 
D) Exercise price 
A)  Interest rate 
B)  Time to expiration 
C)  Volatility of stock price 
D) Exercise price

Question 15

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 16

Why is the value of a call option said to increase as the interest rate increases?

Accepted Answer

A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D) Interest rate increases reduce the option premium. 
A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D) Interest rate increases reduce the option premium.

Question 17

Which one of the following option traders receive the option premium?

Accepted Answer

A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D) Neither buyers nor sellers receive premiums 
A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D) Neither buyers nor sellers receive premiums

Question 18

A decrease in which one of the following terms will cause an increase in the call value of an option?

Accepted Answer

A)  Interest rates 
B)  Time to maturity 
C)  Exercise price 
D) Volatility of the stock 
A)  Interest rates 
B)  Time to maturity 
C)  Exercise price 
D) Volatility of the stock

Question 19

Investors who buy calls or puts have a cap on their possible losses from holding options. Specifically, they cannot lose more than the value of their premium. How does this differ for investors who sell options?

Accepted Answer

Investors who sell calls or puts have un

Question 20

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 
A)  -$14 
B)  -$10 
C)  $10 
D) $18

Exam 23: Options

At what point is the payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

You purchased a stock for $36 a share, a call option with an exercise price of $35 and a premium of $3, and a put option with an exercise price of $35 and a premium of $2. What will be your net profit if you close out all three positions when the stock is selling for $37 a share?

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.

Why would bondholders be willing to pay more for bonds that contain warrants?

What is the profit per share for an investor who has purchased a share of stock for $42 and purchased a put option with an exercise price of $40 and a premium of $2 if the stock was valued at $30 at expiration?

What is the difference between an American call option and a European call option?

When does a change in the value of a call option come the closest to matching the price change in a share of stock?

Which one of the following is correct for the owner of a September put, valued at $20, on CBA Corp. with a strike price of $80? CBA currently trades at $67.

Warrants do not expire.

A stock is currently selling for $70 per share and its call option has an exercise price of $90. What is the lower limit on the value of the call option?

You purchased a call option with an exercise price of $50 and a premium of $6. If you exercise the option when the stock price is $60, your net proceeds will be:

Which one of the following conditions will typically be present when a firm calls a bond prior to maturity?

An increase in which one of the following will decrease the value of a call option?

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?

Why is the value of a call option said to increase as the interest rate increases?

Which one of the following option traders receive the option premium?

A decrease in which one of the following terms will cause an increase in the call value of an option?

Investors who buy calls or puts have a cap on their possible losses from holding options. Specifically, they cannot lose more than the value of their premium. How does this differ for investors who sell options?

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.

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Measuring Corporate Performance

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Using Discounted Cash-Flow Analysis to Make Investment Decisions

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Introduction to Risk, Return, and the Opportunity Cost of Capital

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Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

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