Question 1

A problem with the net present value approach to project valuation is that:

Accepted Answer

A) the opportunity to intervene in a project has a negative NPV. 
B) the opportunity to intervene in a project is worthless. 
C) it assumes that there is no opportunity for the investing company to intervene in the project after it has begun. 
D) it is inferior to the IRR method of project evaluation. 
A) the opportunity to intervene in a project has a negative NPV. 
B) the opportunity to intervene in a project is worthless. 
C) it assumes that there is no opportunity for the investing company to intervene in the project after it has begun. 
D) it is inferior to the IRR method of project evaluation.

Question 2

Assume that the current price of an XYZ share is $4 00 and that the price of a call option on these shares is $0 80 If we know that a 10 c movement in share price will be accompanied in the same direction by a 5c movement in the call price,then an appropriate risk-free hedge will be:

Accepted Answer

A) writing five calls for every share held. 
B) writing four calls for every share held. 
C) writing three calls for every share held. 
D) writing two calls for every share held. 
A) writing five calls for every share held. 
B) writing four calls for every share held. 
C) writing three calls for every share held. 
D) writing two calls for every share held.

Question 3

Calculate the price of a one-month European call option given the following information: the exercise price is $19,the current share price is $20 and the risk-free interest rate is 15% p.a.Furthermore,the share price is expected to be either $25 or $15 at the end of the month.Assume a risk-neutral world.

Accepted Answer

A) $2.35 
B) $2.59 
C) $2.81 
D) $3.11 
A) $2.35 
B) $2.59 
C) $2.81 
D) $3.11

Question 4

Calculate the price of a one-month European put option given the following information: the exercise price is $19,the current share price is $15 and the risk-free interest rate is 12% p.a.Furthermore,the share price is expected to be either $20 or $13 at the end of the month.Assume a risk-neutral world.

Accepted Answer

A) $2.74 
B) $4.12 
C) $1.82 
D) $1.22 
A) $2.74 
B) $4.12 
C) $1.82 
D) $1.22

Question 5

The call price can be expected to be higher:

Accepted Answer

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

Question 6

What is the payoff of a call option (bought)with an exercise price of $15.00,if the underlying share price is $16.50,at the expiry date of the option?

Accepted Answer

A) $15.00 
B) Zero 
C) $1.00 
D) $1.50 
A) $15.00 
B) Zero 
C) $1.00 
D) $1.50

Question 7

Calculate the price of a European call option if the price of the equivalent put option is $2.00 and the share price,exercise price and risk-free rate are $5.00,$4.50 and 10% p.a. ,respectively,given the option has three months to expiry.

Accepted Answer

A) $2.50 
B) $1.39 
C) $2.61 
D) $2.91 
A) $2.50 
B) $1.39 
C) $2.61 
D) $2.91

Question 8

Use the Black-Scholes formula to find the value of a European call expiring in one year with an exercise price of $100 for a share currently selling for $90.Assume the standard deviation of the continuous rate of return is 30% p.a.and the risk-free interest rate is 10% p.a.

Accepted Answer

A) $0.55 
B) $0.43 
C) $10.52 
D) $9.93 
A) $0.55 
B) $0.43 
C) $10.52 
D) $9.93

Question 9

Which of the following is not a factor that affects the price of an option:

Accepted Answer

A) the exercise price. 
B) capital structure of the underlying share. 
C) expected future dividends. 
D) volatility of the underlying share. 
A) the exercise price. 
B) capital structure of the underlying share. 
C) expected future dividends. 
D) volatility of the underlying share.

Question 10

A call option gives a buyer:

Accepted Answer

A) an asset whose value depends on the value of another asset. 
B) the obligation to buy an asset at a predetermined price. 
C) the right to buy an asset at a predetermined price. 
D) the right to sell an asset at a predetermined price. 
A) an asset whose value depends on the value of another asset. 
B) the obligation to buy an asset at a predetermined price. 
C) the right to buy an asset at a predetermined price. 
D) the right to sell an asset at a predetermined price.

Question 11

The term 'default risk structure of interest rates' refers to the fact that:

Accepted Answer

A) there is a premium due to uncertainty about the future level of interest rates. 
B) interest rates for different maturity ranges are determined independently. 
C) at any point in time as the probability of default increases,the required yield on debt decreases. 
D) at any point in time as the probability of default increases,the required yield on debt increases. 
A) there is a premium due to uncertainty about the future level of interest rates. 
B) interest rates for different maturity ranges are determined independently. 
C) at any point in time as the probability of default increases,the required yield on debt decreases. 
D) at any point in time as the probability of default increases,the required yield on debt increases.

Question 12

Calculate the hedge ratio for the following: call option with exercise price of $10.40,current share price of $9.80 and an expected price at the expiry of the option of either $9.60 or $11.00.

Accepted Answer

A) 1/2 
B) 7/3 
C) 3/7 
D) 2 
A) 1/2 
B) 7/3 
C) 3/7 
D) 2

Question 13

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

Accepted Answer

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

Question 14

The figure '12.00' of a September series of call options refers to the:

Accepted Answer

A) date upon which the option must be exercised. 
B) market price of the underlying asset. 
C) price at which the underlying asset can be sold. 
D) price at which the underlying asset can be purchased. 
A) date upon which the option must be exercised. 
B) market price of the underlying asset. 
C) price at which the underlying asset can be sold. 
D) price at which the underlying asset can be purchased.

Question 15

A contingent claim is best described as:

Accepted Answer

A) a contract readily traded on an exchange. 
B) an asset whose value depends on the value of some other asset. 
C) an asset readily traded on an exchange. 
D) a liability. 
A) a contract readily traded on an exchange. 
B) an asset whose value depends on the value of some other asset. 
C) an asset readily traded on an exchange. 
D) a liability.

Question 16

A convertible note is equivalent to ordinary debt plus:

Accepted Answer

A) a call option on the assets of the company. 
B) a call option on the shares of the company. 
C) a put option on the assets of the company. 
D) a put option on the shares of the company. 
A) a call option on the assets of the company. 
B) a call option on the shares of the company. 
C) a put option on the assets of the company. 
D) a put option on the shares of the company.

Question 17

At expiry,a call option is worth:

Accepted Answer

A) the maximum of the exercise price minus the share price and zero. 
B) at least the exercise price. 
C) at least the share price. 
D) the maximum of the share price minus the exercise price and zero. 
A) the maximum of the exercise price minus the share price and zero. 
B) at least the exercise price. 
C) at least the share price. 
D) the maximum of the share price minus the exercise price and zero.

Question 18

Calculate the hedge ratio for the following: call option with exercise price of $3.20,current share price of $3.10 and an expected price at the expiry of the option of either $3.40 or $2.80.

Accepted Answer

A) 3 
B) 1/3 
C) 1/2 
D) 2/3 
A) 3 
B) 1/3 
C) 1/2 
D) 2/3

Question 19

There is a ________________ relationship between the price of a call option and the magnitude of expected future dividends.

Accepted Answer

The answer of There is a ________________ relationship between the...

A problem with the net present value approach to project valuation is that:

Assume that the current price of an XYZ share is $4 00 and that the price of a call option on these shares is $0 80 If we know that a 10 c movement in share price will be accompanied in the same direction by a 5c movement in the call price,then an appropriate risk-free hedge will be:

The call price can be expected to be higher:

What is the payoff of a call option (bought)with an exercise price of $15.00,if the underlying share price is $16.50,at the expiry date of the option?

Calculate the price of a European call option if the price of the equivalent put option is $2.00 and the share price,exercise price and risk-free rate are $5.00,$4.50 and 10% p.a. ,respectively,given the option has three months to expiry.

Use the Black-Scholes formula to find the value of a European call expiring in one year with an exercise price of $100 for a share currently selling for $90.Assume the standard deviation of the continuous rate of return is 30% p.a.and the risk-free interest rate is 10% p.a.

Which of the following is not a factor that affects the price of an option:

A call option gives a buyer:

The term 'default risk structure of interest rates' refers to the fact that:

Calculate the hedge ratio for the following: call option with exercise price of $10.40,current share price of $9.80 and an expected price at the expiry of the option of either $9.60 or $11.00.

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

The figure '12.00' of a September series of call options refers to the:

A contingent claim is best described as:

A convertible note is equivalent to ordinary debt plus:

At expiry,a call option is worth:

Calculate the hedge ratio for the following: call option with exercise price of $3.20,current share price of $3.10 and an expected price at the expiry of the option of either $3.40 or $2.80.

There is a ________________ relationship between the price of a call option and the magnitude of expected future dividends.

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

Filters

Exam 18: Options and Contingent Claims

A problem with the net present value approach to project valuation is that:

Assume that the current price of an XYZ share is $4 00 and that the price of a call option on these shares is $0 80 If we know that a 10 c movement in share price will be accompanied in the same direction by a 5c movement in the call price,then an appropriate risk-free hedge will be:

The call price can be expected to be higher:

What is the payoff of a call option (bought)with an exercise price of $15.00,if the underlying share price is $16.50,at the expiry date of the option?

Calculate the price of a European call option if the price of the equivalent put option is $2.00 and the share price,exercise price and risk-free rate are $5.00,$4.50 and 10% p.a. ,respectively,given the option has three months to expiry.

Use the Black-Scholes formula to find the value of a European call expiring in one year with an exercise price of $100 for a share currently selling for $90.Assume the standard deviation of the continuous rate of return is 30% p.a.and the risk-free interest rate is 10% p.a.

Which of the following is not a factor that affects the price of an option:

A call option gives a buyer:

The term 'default risk structure of interest rates' refers to the fact that:

Calculate the hedge ratio for the following: call option with exercise price of $10.40,current share price of $9.80 and an expected price at the expiry of the option of either $9.60 or $11.00.

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

The figure '12.00' of a September series of call options refers to the:

A contingent claim is best described as:

A convertible note is equivalent to ordinary debt plus:

At expiry,a call option is worth:

Calculate the hedge ratio for the following: call option with exercise price of $3.20,current share price of $3.10 and an expected price at the expiry of the option of either $3.40 or $2.80.

There is a ________________ relationship between the price of a call option and the magnitude of expected future dividends.

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

Filters