Question 1

If you own a call and a put on a stock with the same exercise price and exercise date,your payoffs:

Accepted Answer

A)  will be positive only if the stock price rises. 
B)  will be positive only if the stock price declines. 
C)  will always be positive and will increase with the size of the stock price change. 
D)  will always be positive but will be larger if the stock price is relatively stable. 
A)  will be positive only if the stock price rises. 
B)  will be positive only if the stock price declines. 
C)  will always be positive and will increase with the size of the stock price change. 
D)  will always be positive but will be larger if the stock price is relatively stable.

Question 2

An investor who sells a put option profits if:

Accepted Answer

A)  stock prices go up. 
B)  stock prices go down. 
C)  the put is exercised. 
D)  interest rates go up. 
A)  stock prices go up. 
B)  stock prices go down. 
C)  the put is exercised. 
D)  interest rates go up.

Question 3

Which one of the following changes will reduce the value of a call option?

Accepted Answer

A)  An increase in the stock price 
B)  An increase in the exercise price 
C)  An increase in the volatility of the stock price 
D)  An increase in interest rates 
A)  An increase in the stock price 
B)  An increase in the exercise price 
C)  An increase in the volatility of the stock price 
D)  An increase in interest rates

Question 4

Kingston Lisle shares are currently selling at $75.The value of a call option on the company's shares with an exercise price of $60 and several months to expiration is:

Accepted Answer

A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero. 
A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero.

Question 5

It is May and you own a June call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

Accepted Answer

A)  Exercise the option now and take the profits. 
B)  Buy the stock of ABC Corp because option traders seem to be optimistic about its prospects. 
C)  Sell your ABC stock before its price declines. 
D)  Sit and wait until the June expiration. 
A)  Exercise the option now and take the profits. 
B)  Buy the stock of ABC Corp because option traders seem to be optimistic about its prospects. 
C)  Sell your ABC stock before its price declines. 
D)  Sit and wait until the June expiration.

Question 6

What is the most an investor can lose if sells a call on the firm's stock with an exercise price of $100?

Accepted Answer

A)  $100 
B)  $0 
C)  $50 
D)  Unlimited losses 
A)  $100 
B)  $0 
C)  $50 
D)  Unlimited losses

Question 7

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

Accepted Answer

A)  historical cost of the asset. 
B)  resale value of the asset at abandonment. 
C)  foregone revenues anticipated from the project. 
D)  foregone interest on the bonds used to finance the real assets. 
A)  historical cost of the asset. 
B)  resale value of the asset at abandonment. 
C)  foregone revenues anticipated from the project. 
D)  foregone interest on the bonds used to finance the real assets.

Question 8

Put-call parity states that:

Accepted Answer

A)  Price of stock + price of call = price of put + PV(exercise price) 
B)  Price of stock + PV(exercise price) = price of call + price of put 
C)  Price of stock + price of put = price of call + PV(exercise price) 
D)  Price of stock = price of put + price of call − exercise price 
A)  Price of stock + price of call = price of put + PV(exercise price) 
B)  Price of stock + PV(exercise price) = price of call + price of put 
C)  Price of stock + price of put = price of call + PV(exercise price) 
D)  Price of stock = price of put + price of call − exercise price

Question 9

The Financial Accounting Standards Board (FASB)stipulates that companies must use an option valuation model to estimate the fair value of any option grants and then deduct this value when calculating profits.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

What is the lower bound on the value of a put option?

Accepted Answer

A)  Maximum of zero or exercise price − stock price 
B)  Maximum of zero or stock price − exercise price 
C)  Stock price − exercise price 
D)  Exercise price − stock price 
A)  Maximum of zero or exercise price − stock price 
B)  Maximum of zero or stock price − exercise price 
C)  Stock price − exercise price 
D)  Exercise price − stock price

Question 13

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 14

A call option has an exercise price of $60.When the option expires,the price of the stock is exactly $60.What is the value of your call option?

Accepted Answer

A)  $1 
B)  −$1 
C)  Zero 
D)  $60 
A)  $1 
B)  −$1 
C)  Zero 
D)  $60

Question 15

Which one of the following statements is correct?

Accepted Answer

A)  A convertible bond will be worth less than a similar non-convertible bond. 
B)  A callable bond will be worth less than a similar non-callable bond. 
C)  A callable bond will be worth more than a similar convertible bond. 
D)  Warrants are always worth more than convertible bonds. 
A)  A convertible bond will be worth less than a similar non-convertible bond. 
B)  A callable bond will be worth less than a similar non-callable bond. 
C)  A callable bond will be worth more than a similar convertible bond. 
D)  Warrants are always worth more than convertible bonds.

Question 16

Which of the following statements is true of the holder of a call option?

Accepted Answer

A)  Option holders pay no income taxes. 
B)  Holders of a call option have restricted profits. 
C)  Option holders do not receive dividends 
D)  Investors in call options do not have to exercise them and therefore cannot sustain losses. 
A)  Option holders pay no income taxes. 
B)  Holders of a call option have restricted profits. 
C)  Option holders do not receive dividends 
D)  Investors in call options do not have to exercise them and therefore cannot sustain losses.

Question 17

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

Accepted Answer

A)  far above the exercise price. 
B)  closest to the exercise price. 
C)  approaching zero. 
D)  less than the exercise price. 
A)  far above the exercise price. 
B)  closest to the exercise price. 
C)  approaching zero. 
D)  less than the exercise price.

Question 18

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

Question 19

The value of a put at expiration is defined as the:

Accepted Answer

A)  minimum of zero or the stock price minus the exercise price. 
B)  minimum of zero or the exercise price minus the stock price. 
C)  maximum of zero or the stock price minus the exercise price. 
D)  maximum of zero or the exercise price minus the stock price. 
A)  minimum of zero or the stock price minus the exercise price. 
B)  minimum of zero or the exercise price minus the stock price. 
C)  maximum of zero or the stock price minus the exercise price. 
D)  maximum of zero or the exercise price minus the stock price.

Question 20

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

Accepted Answer

A)  The maximum of zero or the stock price − the exercise price. 
B)  The maximum of the exercise price − the stock price or zero. 
C)  zero. 
D)  the exercise price. 
A)  The maximum of zero or the stock price − the exercise price. 
B)  The maximum of the exercise price − the stock price or zero. 
C)  zero. 
D)  the exercise price.

Exam 23: Options

If you own a call and a put on a stock with the same exercise price and exercise date,your payoffs:

An investor who sells a put option profits if:

Which one of the following changes will reduce the value of a call option?

Kingston Lisle shares are currently selling at $75.The value of a call option on the company's shares with an exercise price of $60 and several months to expiration is:

It is May and you own a June call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

What is the most an investor can lose if sells a call on the firm's stock with an exercise price of $100?

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

Put-call parity states that:

The Financial Accounting Standards Board (FASB)stipulates that companies must use an option valuation model to estimate the fair value of any option grants and then deduct this value when calculating profits.

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

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

What is the lower bound on the value of a put option?

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

A call option has an exercise price of $60.When the option expires,the price of the stock is exactly $60.What is the value of your call option?

Which one of the following statements is correct?

Which of the following statements is true of the holder of a call option?

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

Why does the value of a call option increase as the interest rate increases?

The value of a put at expiration is defined as the:

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

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