Question 1

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Accepted Answer

A) True 
 B)False

Question 2

An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
∙The price of the stock is $40.
∙The strike price of the option is $40.
∙The option matures in 3 months (t = 0.25).
∙The standard deviation of the stock's returns is 0.40,and the variance is 0.16.
∙The risk-free rate is 6%.
Given this information,the analyst then calculated the following necessary components of the Black-Scholes model:
∙d1 = 0.175
∙d2 = −0.025
∙N(d1)= 0.56946
∙N(d2)= 0.49003
N(d1)and N(d2)represent areas under a standard normal distribution function.Using the Black-Scholes model,what is the value of the call option?

Accepted Answer

A) $2.81 
B) $3.12 
C) $3.47 
D) $3.82 
E) $4.20 
A) $2.81 
B) $3.12 
C) $3.47 
D) $3.82 
E) $4.20

Question 3

As the price of a stock rises above the strike price,the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Accepted Answer

A) True 
 B)False

Question 4

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

Accepted Answer

A) The options with the $25 strike price will sell for less than the options with the $35 strike price. 
B) The options with the $25 strike price have an exercise value greater than $5. 
C) The options with the $35 strike price have an exercise value greater than $0. 
D) If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5. 
E) The options with the $25 strike price will sell for $5. 
A) The options with the $25 strike price will sell for less than the options with the $35 strike price. 
B) The options with the $25 strike price have an exercise value greater than $5. 
C) The options with the $35 strike price have an exercise value greater than $0. 
D) If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5. 
E) The options with the $25 strike price will sell for $5.

Question 5

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,provided the strike prices for the put and call are the same.

Accepted Answer

A) True 
 B)False

Question 6

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Accepted Answer

A) Put 
B) Naked 
C) Covered 
D) Out-of-the-money 
E) In-the-money 
A) Put 
B) Naked 
C) Covered 
D) Out-of-the-money 
E) In-the-money

Question 7

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A) Call options generally sell at a price less than their exercise value. 
B) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value. 
C) Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, 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 makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit. 
A) Call options generally sell at a price less than their exercise value. 
B) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value. 
C) Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, 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 makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

As the price of a stock rises above the strike price,the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

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,provided the strike prices for the put and call are the same.

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

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

Filters

Exam 5: Financial Options

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

As the price of a stock rises above the strike price,the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

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,provided the strike prices for the put and call are the same.

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

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

Filters