Question 1

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 2

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit or loss per share at tomorrow's expiration?

Accepted Answer

A)  - $3 
B)  $3 
C)  $7 
D)  $10 
A)  - $3 
B)  $3 
C)  $7 
D)  $10

Question 3

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 4

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

@#IMG-DLM& Notice that,if S is between 45 and 65 a

Question 5

When the stock price is very high compared to the exercise price,the call option premium approximates the difference between the stock price and strike price.

Accepted Answer

A) True 
 B)False

Question 6

The price of a call option increases while its exercise price decreases.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following changes will decrease the value of a call option?

Accepted Answer

A)  An increase in stock price 
B)  An increase in strike price 
C)  An increase in stock price volatility 
D)  An increase in interest rates 
A)  An increase in stock price 
B)  An increase in strike price 
C)  An increase in stock price volatility 
D)  An increase in interest rates

Question 9

Three months ago 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% 
B)  150% 
C)  100% 
D)  50% 
A)  200% 
B)  150% 
C)  100% 
D)  50%

Question 10

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 11

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 12

The major difference between options on real assets and options on financial assets is that options on:

Accepted Answer

A)  financial assets are costly. 
B)  financial assets have a higher probability of positive payoff. 
C)  real assets are implicit, rather than explicit. 
D)  real assets are not influenced by price volatility. 
A)  financial assets are costly. 
B)  financial assets have a higher probability of positive payoff. 
C)  real assets are implicit, rather than explicit. 
D)  real assets are not influenced by price volatility.

Question 13

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 14

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.

Accepted Answer

A)  $0 
B)  $5 
C)  $50 
D)  $65 
A)  $0 
B)  $5 
C)  $50 
D)  $65

Question 15

At expiration a call option will have no value if the stock price is less than exercise price.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option. 
A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option.

Question 17

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration,then the option:

Accepted Answer

A)  expires worthless. 
B)  will not be exercised. 
C)  is worth $7 per share. 
D)  cost too much initially. 
A)  expires worthless. 
B)  will not be exercised. 
C)  is worth $7 per share. 
D)  cost too much initially.

Question 18

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 19

In December 2007 a call option on Google stock with a June 2008 expiration and an exercise price of $720 sold for $80.50.If you bought this call,and find that Google share is sold for $840 in June,what would be the proceeds and return from exercising the call?

Accepted Answer

In December 2007 a call option on Google

Question 20

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.

Exam 23: Options

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?

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit or loss per share at tomorrow's expiration?

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

When the stock price is very high compared to the exercise price,the call option premium approximates the difference between the stock price and strike price.

The price of a call option increases while its exercise price decreases.

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.

Which of the following changes will decrease the value of a call option?

Three months ago 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?

The payoffs from investing in options are designed so that:

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

The major difference between options on real assets and options on financial assets is that options on:

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

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.

At expiration a call option will have no value if the stock price is less than exercise price.

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

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration,then the 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?

In December 2007 a call option on Google stock with a June 2008 expiration and an exercise price of $720 sold for $80.50.If you bought this call,and find that Google share is sold for $840 in June,what would be the proceeds and return from exercising the call?

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

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

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

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

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Risk, Return, and Capital Budgeting

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