Question 1

A stock is selling for $85 at the expiration of an option contract.Which of the following options on the stock will most likely be exercised?

Accepted Answer

A)  Call option with exercise price of $65 
B)  Put option with exercise price of $65 
C)  Call option with exercise price of $85 
D)  Put option with exercise price of $85 
A)  Call option with exercise price of $65 
B)  Put option with exercise price of $65 
C)  Call option with exercise price of $85 
D)  Put option with exercise price of $85

Question 2

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option is about to expire and ZZZ stock is currently trading at $28 per share.What is the value of Joe's position?

Accepted Answer

A)  $12 
B)  −$12 
C)  $8 
D)  $16 
A)  $12 
B)  −$12 
C)  $8 
D)  $16

Question 3

Real options 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 those 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 those held by shareholders of a firm with financial leverage.

Question 4

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 5

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price? (All option months are in the same calendar year.)

Accepted Answer

A)  September put; $65 exercise price 
B)  September put; $75 exercise price 
C)  December put; $65 exercise price 
D)  December put; $75 exercise price 
A)  September put; $65 exercise price 
B)  September put; $75 exercise price 
C)  December put; $65 exercise price 
D)  December put; $75 exercise price

Question 6

Warrants do not expire.

Accepted Answer

A) True 
 B)False

Question 7

The VIX is an estimate of expected future market volatility.

Accepted Answer

A) True 
 B)False

Question 8

The longer the time until expiration of a call option,the lower the value of the option.

Accepted Answer

A) True 
 B)False

Question 9

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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

Question 11

The value of a convertible bond is always less than the value of a straight bond with similar coupon and maturity.

Accepted Answer

A) True 
 B)False

Question 12

The value of a call option increases as the time to expiration increases because:

Accepted Answer

A)  the exercise price continually decreases. 
B)  the opportunity increases for the stock price to exceed the exercise price. 
C)  the dividends accumulate while waiting to be paid. 
D)  the option can be repeatedly exercised. 
A)  the exercise price continually decreases. 
B)  the opportunity increases for the stock price to exceed the exercise price. 
C)  the dividends accumulate while waiting to be paid. 
D)  the option can be repeatedly exercised.

Question 13

The writer of a call option hopes that the stock price will:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  split. 
D)  produce quarterly cash dividends. 
A)  decrease. 
B)  increase. 
C)  split. 
D)  produce quarterly cash dividends.

Question 14

Executive stock options are issued with the hope that the recipients will:

Accepted Answer

A)  sell the shares they currently own thereby diversifying the firm's ownership. 
B)  work to increase the value of the firm's stock. 
C)  never exercise them. 
D)  sell their shares at the option's exercise price. 
A)  sell the shares they currently own thereby diversifying the firm's ownership. 
B)  work to increase the value of the firm's stock. 
C)  never exercise them. 
D)  sell their shares at the option's exercise price.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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

Question 17

Stocks that have more volatile price changes have more valuable call options because call holders:

Accepted Answer

A)  capture upside potential without additional downside risk. 
B)  realize that volatility decreases the present value of the exercise price. 
C)  have too little variability in the exercise price. 
D)  have transferred all risk to put holders. 
A)  capture upside potential without additional downside risk. 
B)  realize that volatility decreases the present value of the exercise price. 
C)  have too little variability in the exercise price. 
D)  have transferred all risk to put holders.

Question 18

Three months ago you bought a put option with an exercise price of $100.What is the value of this option at expiration if the stock price is $110?

Accepted Answer

A)  $10 
B)  −$110 
C)  $0 
D)  −$10 
A)  $10 
B)  −$110 
C)  $0 
D)  −$10

Question 19

The lower limit on a call option's value is equal to the greater of zero or the exercise price minus the stock price.

Accepted Answer

A) True 
 B)False

Question 20

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 about 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 about to expire.

Exam 23: Options

A stock is selling for $85 at the expiration of an option contract.Which of the following options on the stock will most likely be exercised?

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option is about to expire and ZZZ stock is currently trading at $28 per share.What is the value of Joe's position?

Real options are:

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.

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price? (All option months are in the same calendar year.)

Warrants do not expire.

The VIX is an estimate of expected future market volatility.

The longer the time until expiration of a call option,the lower the value of the option.

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

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

The value of a convertible bond is always less than the value of a straight bond with similar coupon and maturity.

The value of a call option increases as the time to expiration increases because:

The writer of a call option hopes that the stock price will:

Executive stock options are issued with the hope that the recipients will:

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

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

Stocks that have more volatile price changes have more valuable call options because call holders:

Three months ago you bought a put option with an exercise price of $100.What is the value of this option at expiration if the stock price is $110?

The lower limit on a call option's value is equal to the greater of zero or the exercise price minus the stock price.

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

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