Question 1

American put options are worth more than European put options because:

Accepted Answer

A) a put would not be exercised unless the share price exceeded the exercise price. 
B) it can be rational to exercise an American put option before expiry. 
C) they are more volatile. 
D) they are less volatile. 
A) a put would not be exercised unless the share price exceeded the exercise price. 
B) it can be rational to exercise an American put option before expiry. 
C) they are more volatile. 
D) they are less volatile. B

Question 2

Which option gives the right to sell an underlying asset at a fixed price?

Accepted Answer

A) Put option. 
B) American option. 
C) Call option. 
D) European option. 
A) Put option. 
B) American option. 
C) Call option. 
D) European option. A

Question 3

A right to discontinue an investment project is the:

Accepted Answer

A) option to defer. 
B) option to study. 
C) option to abandon. 
D) none of the given options. 
A) option to defer. 
B) option to study. 
C) option to abandon. 
D) none of the given options. C

Question 4

A rights issue is an example of:

Accepted Answer

A) a contingent claim that does not affect a company's capital structure. 
B) a put option issued by a company. 
C) a call option issued by a company. 
D) a redeemable preference share. 
A) a contingent claim that does not affect a company's capital structure. 
B) a put option issued by a company. 
C) a call option issued by a company. 
D) a redeemable preference share.

Question 5

An option that gives the buyer the right to exercise at any time up to the expiry date is called:

Accepted Answer

A) a put option. 
B) an American-type option. 
C) a call option. 
D) a European-type option. 
A) a put option. 
B) an American-type option. 
C) a call option. 
D) a European-type option.

Question 6

The exercise price of an option is:

Accepted Answer

A) the price at which an option holder has the right to buy or sell an asset. 
B) not the strike price but the market price of an option. 
C) the traded price of an option. 
D) the market price of a put option. 
A) the price at which an option holder has the right to buy or sell an asset. 
B) not the strike price but the market price of an option. 
C) the traded price of an option. 
D) the market price of a put option.

Question 7

A 'collar' is a combination of options that involves holding an underlying asset and purchasing a put and selling a call on that asset.

Accepted Answer

A) True 
 B)False

Question 8

The __________________ model is a mathematical model that expresses the price of a call as a function of five variables.

Accepted Answer

The answer of The __________________ model is a mathematical model...

Question 9

Put-call parity demonstrates that the cash flows derived from holding a European put option on a share that does not pay dividends can be replicated by a combination of purchasing the share,borrowing at the risk-free rate and selling the counterpart call.

Accepted Answer

A) True 
 B)False

Question 10

The value of an option,if exercised immediately,is known as:

Accepted Answer

A) time value. 
B) strike value. 
C) intrinsic value. 
D) none of the given options as the option cannot be exercised immediately. 
A) time value. 
B) strike value. 
C) intrinsic value. 
D) none of the given options as the option cannot be exercised immediately.

Question 11

A payoff structure resembling that of a long futures position can be created by:

Accepted Answer

A) buying a call option and selling a put option,with the same exercise price and premium for both options. 
B) selling a call option and buying a put option,with the same exercise price and premium for both options. 
C) buying a call option and buying a put option,with the same exercise price and premium for both options. 
D) selling a call option and selling a put option,with the same exercise price and premium for both options. 
A) buying a call option and selling a put option,with the same exercise price and premium for both options. 
B) selling a call option and buying a put option,with the same exercise price and premium for both options. 
C) buying a call option and buying a put option,with the same exercise price and premium for both options. 
D) selling a call option and selling a put option,with the same exercise price and premium for both options.

Question 12

Calculate the price of a European put option if the price of the equivalent European call option is $6 and the share price,exercise price and risk-free rate (continuously compounded)are $30,$28 and 15% p.a. ,respectively.The options have six months to expiry.Assume that put-call parity holds.

Accepted Answer

A) $10.02 
B) $2.05 
C) $1.98 
D) $9.95 
E) $2.97 
A) $10.02 
B) $2.05 
C) $1.98 
D) $9.95 
E) $2.97

Question 13

For a put option (bought)with an exercise price of $9.50,the maximum payoff is:

Accepted Answer

A) $5.00 
B) Zero 
C) $9.50 
D) None of the given options. 
A) $5.00 
B) Zero 
C) $9.50 
D) None of the given options.

Question 14

A __________ option provides the right,but not the obligation,to undertake some business decisions.

Accepted Answer

The answer of A __________ option provides the right,but not...

Question 15

A convertible bond is an example of a ____________ claim.

Accepted Answer

The answer of A convertible bond is an example of...

Question 16

Which of the following enables an arbitrage profit to be made (excluding transaction costs)from a call option if the market price of the underlying share is $5 50,the price of the call is $1 50,and the exercise price is $3 80?

Accepted Answer

A) Buy the call option,exercise it and sell the underlying share. 
B) Buy a put option,exercise it and buy the underlying share. 
C) Buy a call option and hold onto it until expiry. 
D) Sell a put option now and realise the profit. 
A) Buy the call option,exercise it and sell the underlying share. 
B) Buy a put option,exercise it and buy the underlying share. 
C) Buy a call option and hold onto it until expiry. 
D) Sell a put option now and realise the profit.

Question 17

The call price can be expected to be higher:

Accepted Answer

A) the lower the current share price 
B) the higher the expected dividend 
C) the higher the exercise price 
D) the higher the risk-free interest rate 
A) the lower the current share price 
B) the higher the expected dividend 
C) the higher the exercise price 
D) the higher the risk-free interest rate

Question 18

Which of the following regarding 'American-type' put options is false?

Accepted Answer

A) The higher the current share price,the more valuable the option. 
B) The higher the exercise price,the more valuable the option. 
C) The greater the put price,the longer the term to expiry. 
D) The more volatile the underlying share price,the more valuable the option. 
A) The higher the current share price,the more valuable the option. 
B) The higher the exercise price,the more valuable the option. 
C) The greater the put price,the longer the term to expiry. 
D) The more volatile the underlying share price,the more valuable the option.

Question 19

Which of the following statements regarding 'American-type' call options is false?

Accepted Answer

A) The higher the current share price,the greater the call price. 
B) The higher the exercise price,the lower the call price. 
C) The call price is greater,the longer the term to expiry. 
D) The lower the risk-free interest rate,the higher the call price. 
A) The higher the current share price,the greater the call price. 
B) The higher the exercise price,the lower the call price. 
C) The call price is greater,the longer the term to expiry. 
D) The lower the risk-free interest rate,the higher the call price.

Question 20

Calculate the price of a European put option if the price of the equivalent European call option is $1.05 and the share price,exercise price and risk-free rate are $3.00,$2.50 and 10% p.a. ,respectively,given the option has three months to expiry.

Accepted Answer

A) $0.49 
B) $0.32 
C) $0.55 
D) $1.05 
A) $0.49 
B) $0.32 
C) $0.55 
D) $1.05

Exam 18: Options and Contingent Claims

American put options are worth more than European put options because:

Which option gives the right to sell an underlying asset at a fixed price?

A right to discontinue an investment project is the:

A rights issue is an example of:

An option that gives the buyer the right to exercise at any time up to the expiry date is called:

The exercise price of an option is:

A 'collar' is a combination of options that involves holding an underlying asset and purchasing a put and selling a call on that asset.

The __________________ model is a mathematical model that expresses the price of a call as a function of five variables.

Put-call parity demonstrates that the cash flows derived from holding a European put option on a share that does not pay dividends can be replicated by a combination of purchasing the share,borrowing at the risk-free rate and selling the counterpart call.

The value of an option,if exercised immediately,is known as:

A payoff structure resembling that of a long futures position can be created by:

Calculate the price of a European put option if the price of the equivalent European call option is $6 and the share price,exercise price and risk-free rate (continuously compounded)are $30,$28 and 15% p.a. ,respectively.The options have six months to expiry.Assume that put-call parity holds.

For a put option (bought)with an exercise price of $9.50,the maximum payoff is:

A __________ option provides the right,but not the obligation,to undertake some business decisions.

A convertible bond is an example of a ____________ claim.

Which of the following enables an arbitrage profit to be made (excluding transaction costs)from a call option if the market price of the underlying share is $5 50,the price of the call is $1 50,and the exercise price is $3 80?

The call price can be expected to be higher:

Which of the following regarding 'American-type' put options is false?

Which of the following statements regarding 'American-type' call options is false?

Calculate the price of a European put option if the price of the equivalent European call option is $1.05 and the share price,exercise price and risk-free rate are $3.00,$2.50 and 10% p.a. ,respectively,given the option has three months to expiry.

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Applying the Time Value of Money to Security Valuation

Project Evaluation: Principles and Methods

The Application of Project Evaluation Methods

Risk and Return

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Payout Policy

Principles of Capital Structure

Capital Structure Decisions

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

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