Question 1

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Accepted Answer

A) American delta 
B) American call 
C) American put 
D) European put 
E) European call 
A) American delta 
B) American call 
C) American put 
D) European put 
E) European call

Question 2

Selling an option is generally more valuable than exercising the option because of the option's:

Accepted Answer

A) riskless value. 
B) intrinsic value. 
C) standard deviation. 
D) exercise price. 
E) time premium. 
A) riskless value. 
B) intrinsic value. 
C) standard deviation. 
D) exercise price. 
E) time premium.

Question 3

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

Accepted Answer

A) $12,203 
B) $12,245 
C) $12,287 
D) $12,241 
E) $12,367 
A) $12,203 
B) $12,245 
C) $12,287 
D) $12,241 
E) $12,367

Question 4

The seller of a European call option has the:

Accepted Answer

A) right, but not the obligation, to buy a stock at a specified price on a specified date. 
B) right to buy a stock at a specified price during a specified period of time. 
C) obligation to sell a stock on a specified date but only at the specified price. 
D) obligation to buy a stock some time during a specified period at the specified price. 
E) obligation to buy a stock at the lower of the exercise price or the market price on the expiration date. 
A) right, but not the obligation, to buy a stock at a specified price on a specified date. 
B) right to buy a stock at a specified price during a specified period of time. 
C) obligation to sell a stock on a specified date but only at the specified price. 
D) obligation to buy a stock some time during a specified period at the specified price. 
E) obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.

Question 5

Which one of the following statements related to options is correct?

Accepted Answer

A) American stock options can be exercised but not resold. 
B) A European call is either equal to or less valuable than a comparable American call. 
C) European puts can be resold but can never be exercised. 
D) European options can be exercised on any dividend payment date. 
E) American options are valued using the Black-Scholes option pricing model. 
A) American stock options can be exercised but not resold. 
B) A European call is either equal to or less valuable than a comparable American call. 
C) European puts can be resold but can never be exercised. 
D) European options can be exercised on any dividend payment date. 
E) American options are valued using the Black-Scholes option pricing model.

Question 6

You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

Accepted Answer

A) $6,000.00 
B) $6,048.50 
C) $6,179.25 
D) $6,202.22 
E) $6,415.69 
A) $6,000.00 
B) $6,048.50 
C) $6,179.25 
D) $6,202.22 
E) $6,415.69

Question 7

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Accepted Answer

A) equal to one. 
B) between zero and one. 
C) equal to zero. 
D) between zero and minus one. 
E) equal to minus one. 
A) equal to one. 
B) between zero and one. 
C) equal to zero. 
D) between zero and minus one. 
E) equal to minus one.

Question 8

Which of the following variables are included in the Black-Scholes call option pricing formula?
I.put premium
II.N(d1)
III.exercise price
IV.stock price

Accepted Answer

A) III and IV only 
B) I, II, and IV only 
C) II, III, and IV only 
D) I, III, and IV only 
E) I, II, III, and IV 
A) III and IV only 
B) I, II, and IV only 
C) II, III, and IV only 
D) I, III, and IV only 
E) I, II, III, and IV

Question 9

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Accepted Answer

A) Change in option value ≈ Change in stock value/Delta 
B) Change in option value ≈ Change in stock value/(1 - Delta) 
C) Change in option value ≈ Change in stock value/(1 + Delta) 
D) Change in option value ≈ Change in stock value × (1 - Delta) 
E) Change in option value ≈ Change in stock value × Delta 
A) Change in option value ≈ Change in stock value/Delta 
B) Change in option value ≈ Change in stock value/(1 - Delta) 
C) Change in option value ≈ Change in stock value/(1 + Delta) 
D) Change in option value ≈ Change in stock value × (1 - Delta) 
E) Change in option value ≈ Change in stock value × Delta

Question 10

Put-call parity is defined as the relationship between which of the following variables?
I.risk-free asset
II.underlying stock price
III.call option
IV.put option

Accepted Answer

A) I and II only 
B) II and III only 
C) II, III, and IV only 
D) I, II, and III only 
E) I, II, III, and IV 
A) I and II only 
B) II and III only 
C) II, III, and IV only 
D) I, II, and III only 
E) I, II, III, and IV

Question 11

The implied standard deviation used in the Black-Scholes option pricing model is:

Accepted Answer

A) based on historical performance. 
B) a prediction of the volatility of the return on the underlying asset over the life of the option. 
C) a measure of the time decay of an option. 
D) an estimate of the future value of an option given a strike price (
E) . 
E) a measure of the historical intrinsic value of an option. 
A) based on historical performance. 
B) a prediction of the volatility of the return on the underlying asset over the life of the option. 
C) a measure of the time decay of an option. 
D) an estimate of the future value of an option given a strike price (
E) . 
E) a measure of the historical intrinsic value of an option.

Question 12

Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Accepted Answer

A) 3.95 percent 
B) 4.21 percent 
C) 4.67 percent 
D) 5.38 percent 
E) 5.57 percent 
A) 3.95 percent 
B) 4.21 percent 
C) 4.67 percent 
D) 5.38 percent 
E) 5.57 percent

Question 13

Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

Accepted Answer

A) sell a put option on BAT stock and invest at the risk-free rate of return 
B) buy both a call option and a put option on BAT stock and also lend out funds at the risk-free rate 
C) sell a put and buy a call on BAT stock as well as invest at the risk-free rate of return 
D) lend out funds at the risk-free rate of return and sell a put option on BAT stock 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options on BAT stock 
A) sell a put option on BAT stock and invest at the risk-free rate of return 
B) buy both a call option and a put option on BAT stock and also lend out funds at the risk-free rate 
C) sell a put and buy a call on BAT stock as well as invest at the risk-free rate of return 
D) lend out funds at the risk-free rate of return and sell a put option on BAT stock 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options on BAT stock

Question 14

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

Accepted Answer

A) put-call parity 
B) covered call 
C) protective put 
D) straddle 
E) strangle 
A) put-call parity 
B) covered call 
C) protective put 
D) straddle 
E) strangle

Question 15

The value of a call option delta is best defined as:

Accepted Answer

A) between zero and one. 
B) less than zero. 
C) greater than zero. 
D) greater than or equal to zero. 
E) greater than one. 
A) between zero and one. 
B) less than zero. 
C) greater than zero. 
D) greater than or equal to zero. 
E) greater than one.

Question 16

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Accepted Answer

A) $6.67 
B) $7.02 
C) $7.34 
D) $7.71 
E) $7.80 
A) $6.67 
B) $7.02 
C) $7.34 
D) $7.71 
E) $7.80

Question 17

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

Accepted Answer

A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma. 
A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma.

Question 18

To compute the value of a put using the Black-Scholes option pricing model,you:

Accepted Answer

A) first have to apply the put-call parity relationship. 
B) first have to compute the value of the put as if it is a call. 
C) compute the value of an equivalent call and then subtract that value from one. 
D) compute the value of an equivalent call and then subtract that value from the market price of the stock. 
E) compute the value of an equivalent call and then multiply that value by e-RT. 
A) first have to apply the put-call parity relationship. 
B) first have to compute the value of the put as if it is a call. 
C) compute the value of an equivalent call and then subtract that value from one. 
D) compute the value of an equivalent call and then subtract that value from the market price of the stock. 
E) compute the value of an equivalent call and then multiply that value by e-RT.

Question 19

Which one of the following best defines the primary purpose of a protective put?

Accepted Answer

A) ensure a maximum purchase price in the future 
B) offset an equivalent call option 
C) limit the downside risk of asset ownership 
D) lock in a risk-free rate of return on a financial asset 
E) increase the upside potential return on an investment 
A) ensure a maximum purchase price in the future 
B) offset an equivalent call option 
C) limit the downside risk of asset ownership 
D) lock in a risk-free rate of return on a financial asset 
E) increase the upside potential return on an investment

Question 20

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Accepted Answer

The answer of Identify the five variables that affect the...

Exam 25: Option Valuation

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Selling an option is generally more valuable than exercising the option because of the option's:

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

The seller of a European call option has the:

Which one of the following statements related to options is correct?

You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d1) III.exercise price IV.stock price

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Put-call parity is defined as the relationship between which of the following variables? I.risk-free asset II.underlying stock price III.call option IV.put option

The implied standard deviation used in the Black-Scholes option pricing model is:

Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

The value of a call option delta is best defined as:

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

To compute the value of a put using the Black-Scholes option pricing model,you:

Which one of the following best defines the primary purpose of a protective put?

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Mergers and Acquisitions

Leasing

Filters

Which of the following variables are included in the Black-Scholes call option pricing formula? I.put premium II.N(d₁) III.exercise price IV.stock price