Question 1

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

Accepted Answer

A) True 
 B)False  False

Question 2

If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price),then we would expect the premium to increase as the stock price increases,other things held constant.

Accepted Answer

A) True 
 B)False  False

Question 3

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?

Accepted Answer

A) The exercise price of the option is increased. 
B) The life of the option is increased, i.e., the time until it expires is lengthened. 
C) The Federal Reserve takes actions that increase the risk-free rate. 
D) BLW's stock price becomes more risky (higher variance). 
E) BLW's stock price suddenly increases. 
A) The exercise price of the option is increased. 
B) The life of the option is increased, i.e., the time until it expires is lengthened. 
C) The Federal Reserve takes actions that increase the risk-free rate. 
D) BLW's stock price becomes more risky (higher variance). 
E) BLW's stock price suddenly increases. A

Question 4

The current price of a stock is $22,and at the end of one year its price will be either $27 or $17.The annual risk-free rate is 6.0%,based on daily compounding.A 1-year call option on the stock,with an exercise price of $22,is available.Based on the binomial model,what is the option's value? (Hint: Use daily compounding.)

Accepted Answer

A) $2.43 
B) $2.70 
C) $2.99 
D) $3.29 
E) $3.62 
A) $2.43 
B) $2.70 
C) $2.99 
D) $3.29 
E) $3.62

Question 5

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Accepted Answer

A) $7.33 
B) $7.71 
C) $8.12 
D) $8.55 
E) $9.00 
A) $7.33 
B) $7.71 
C) $8.12 
D) $8.55 
E) $9.00

Question 6

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

Accepted Answer

A) Variability of the stock price. 
B) Option's time to maturity. 
C) Strike price. 
D) All of the above. 
E) None of the above. 
A) Variability of the stock price. 
B) Option's time to maturity. 
C) Strike price. 
D) All of the above. 
E) None of the above.

Question 8

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Accepted Answer

A) True 
 B)False

Question 9

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

Accepted Answer

A) The price of the call option will increase by more than $2. 
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E) The price of the call option will increase by $2. 
A) The price of the call option will increase by more than $2. 
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E) The price of the call option will increase by $2.

Question 10

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Accepted Answer

A) True 
 B)False

Question 11

Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60,what would your pre-tax net profit be?

Accepted Answer

A) −$5.10 
B) $19.90 
C) $20.90 
D) $22.50 
E) $27.60 
A) −$5.10 
B) $19.90 
C) $20.90 
D) $22.50 
E) $27.60

Question 12

Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?

Accepted Answer

A) −$3.10 
B) $16.90 
C) $17.75 
D) $22.50 
E) $25.60 
A) −$3.10 
B) $16.90 
C) $17.75 
D) $22.50 
E) $25.60

Question 13

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A) As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases. 
B) Issuing options provides companies with a low cost method of raising capital. 
C) The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price. 
D) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger. 
E) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value. 
A) As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases. 
B) Issuing options provides companies with a low cost method of raising capital. 
C) The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price. 
D) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger. 
E) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be. 
B) Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be. 
C) Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be. 
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. 
E) If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit. 
A) Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be. 
B) Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be. 
C) Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be. 
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. 
E) If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Question 16

Which of the following statements is most correct,holding other things constant,for XYZ Corporation's traded call options?

Accepted Answer

A) The higher the strike price on XYZ's options, the higher the option's price will be. 
B) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E) The price of these call options is likely to rise if XYZ's stock price rises. 
A) The higher the strike price on XYZ's options, the higher the option's price will be. 
B) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E) The price of these call options is likely to rise if XYZ's stock price rises.

Question 17

The exercise value is the positive difference between the current price of the stock and the call option's strike price.The exercise value is zero if the stock's price is below the strike price

Accepted Answer

A) True 
 B)False

Question 18

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy,this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.

Accepted Answer

A) True 
 B)False

Question 19

An option that gives the holder the right to sell a stock at a specified price at some future time is

Accepted Answer

A) a put option. 
B) an out-of-the-money option. 
C) a naked option. 
D) a covered option. 
E) a call option. 
A) a put option. 
B) an out-of-the-money option. 
C) a naked option. 
D) a covered option. 
E) a call option.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A) Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B) Options typically sell for less than their exercise value. 
C) LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D) An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E) Put options give investors the right to buy a stock at a certain strike price before a specified date. 
A) Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B) Options typically sell for less than their exercise value. 
C) LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D) An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E) Put options give investors the right to buy a stock at a certain strike price before a specified date.

Exam 5: Financial Options

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is most correct,holding other things constant,for XYZ Corporation's traded call options?

The exercise value is the positive difference between the current price of the stock and the call option's strike price.The exercise value is zero if the stock's price is below the strike price

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy,this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.

An option that gives the holder the right to sell a stock at a specified price at some future time is

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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