Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Put-call parity gives the price of a European call option in terms of the price of a European put,the underlying stock,and a zero-coupon bond. 
B) For a given strike price,the value of a call option is higher if the current price of the stock is higher,as there is a greater likelihood the option will end up in-the-money. 
C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D) Because a put is the right to sell the stock,puts with a lower strike price are less valuable. 
A) Put-call parity gives the price of a European call option in terms of the price of a European put,the underlying stock,and a zero-coupon bond. 
B) For a given strike price,the value of a call option is higher if the current price of the stock is higher,as there is a greater likelihood the option will end up in-the-money. 
C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D) Because a put is the right to sell the stock,puts with a lower strike price are less valuable.

Question 2

The maximum value of a one-year American call option on Rearden Metal with a strike price of $60 per share is closest to:

Accepted Answer

A) $0 
B) $1.84 
C) $2.48 
D) $2.86 
A) $0 
B) $1.84 
C) $2.48 
D) $2.86

Question 3

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-Assume it is now January of 2007 and the current risk-free interest rate is 1%.Using Put-Call Parity and the January 30 option (ask price),estimate the relative contribution of the near-term dividends to the value of Merck's stock.

Accepted Answer

A) $4.89 
B) $2.35 
C) $4.30 
D) $20.19 
A) $4.89 
B) $2.35 
C) $4.30 
D) $20.19

Question 4

Luther Industries is currently trading for $27 per share.The stock pays no dividends.A one-year European put option on Luther with a strike price of $30 is currently trading for $2.60.If the risk-free interest rate is 6% per year,then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:

Accepted Answer

A) $1.30 
B) $7.10 
C) $2.60 
D) $1.95 
A) $1.30 
B) $7.10 
C) $2.60 
D) $1.95

Question 5

You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in or out of the money?

Accepted Answer

If you buy 10 call option contracts you

Question 6

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-Assume you want to buy one option contract that with an exercise price closest to being at-the-money and that expires January 2009.The current price that you would have to pay for such a contract is:

Accepted Answer

A) $680 
B) $380 
C) $650 
D) $420 
A) $680 
B) $380 
C) $650 
D) $420

Question 7

As of June of 2016,Facebook (FB)had no debt.Suppose the firm's managers consider issuing zero-coupon debt with a face value of $231 billion due in January of 2019 (19 months)and using the proceeds to pay a special dividend.FB has 2.31 billion shares outstanding,with a market price (June,2016)of $116.62.The risk-free rate over this horizon is 0.25%.
There is a call option trading on FB with a strike price of $100 and a price of $29.24.What is the implied credit spread of Facebook's proposed debt issue assuming perfect capital markets?

Accepted Answer

A) 8.89% 
B) 8.64% 
C) 19.74% 
D) Cannot be determined from information given. 
A) 8.89% 
B) 8.64% 
C) 19.74% 
D) Cannot be determined from information given.

Question 8

The payoff to the holder of a call option is given by:

Accepted Answer

A) C = max(S - K,0) 
B) C = min(K,0) 
C) C = max(K - S,0) 
D) C = min(K - S,0) 
A) C = max(S - K,0) 
B) C = min(K,0) 
C) C = max(K - S,0) 
D) C = min(K - S,0)

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance,equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets,equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets. 
A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance,equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets,equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets.

Question 10

How many of the January 2009 call options are in the money?

Accepted Answer

A) 2 
B) 4 
C) 1 
D) 3 
A) 2 
B) 4 
C) 1 
D) 3

Question 11

KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The maximum value of this put option is:

Accepted Answer

A) $0 
B) $32 
C) $30 
D) $2 
A) $0 
B) $32 
C) $30 
D) $2

Question 12

Use the following information to answer the question(s)below.
Galt Industries is trading for $20 per share and has 25 million shares outstanding.Galt Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten year maturity and a yield to maturity of 8%.
-In describing Galt's equity as a call option,the maturity of this option is:

Accepted Answer

A) 5 years 
B) 10 years 
C) 20 years 
D) infinite 
A) 5 years 
B) 10 years 
C) 20 years 
D) infinite

Question 13

Consider the following equation:
C = S - K + dis(K)+ P
In this equation,S - K tells us:

Accepted Answer

A) the market value of the option. 
B) the time value of the option. 
C) the option spread. 
D) the intrinsic value of the option. 
A) the market value of the option. 
B) the time value of the option. 
C) the option spread. 
D) the intrinsic value of the option.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) A holder would not exercise an in-the-money option. 
B) The option seller,also called the option writer,sells (or writes)the option and has a short position in the contract. 
C) Because the long side has the option to exercise,the short side has an obligation to fulfill the contract. 
D) When the exercise price of an option is equal to the current price of the stock,the option is said to be at-the-money. 
A) A holder would not exercise an in-the-money option. 
B) The option seller,also called the option writer,sells (or writes)the option and has a short position in the contract. 
C) Because the long side has the option to exercise,the short side has an obligation to fulfill the contract. 
D) When the exercise price of an option is equal to the current price of the stock,the option is said to be at-the-money.

Question 15

Consider the following equation:
C = P + S - PV(K)- PV(Div)
In this equation the term K refers to:

Accepted Answer

A) the value of the call option. 
B) the strike price of the option. 
C) the price of a zero coupon bond. 
D) the stock's current price. 
A) the value of the call option. 
B) the strike price of the option. 
C) the price of a zero coupon bond. 
D) the stock's current price.

Question 16

Use the following information to answer the question(s)below.
Consider an American put option on Rearden Metal stock with a strike price of $60 and one year to expiration.Assume that Rearden pays no dividends,its stock is currently trading at $15 per share,and the one year interest rate is 5%.Also assume that it is optimal to exercise this put option early.
-The price of a one-year American put option on Rearden Metal with a strike price of $70 per share is closest to:

Accepted Answer

A) $45 
B) $50 
C) $55 
D) $60 
A) $45 
B) $50 
C) $55 
D) $60

Question 17

As the seller of an option,you are guaranteed to receive the:

Accepted Answer

A) exercise price. 
B) strike price. 
C) risk premium. 
D) option premium. 
A) exercise price. 
B) strike price. 
C) risk premium. 
D) option premium.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) An American call on a non-dividend-paying stock has the same price as its European counterpart. 
B) The price of any call option on a non-dividend-paying stock always exceeds its intrinsic value. 
C) It is never optimal to exercise a call option on a dividend-paying stock early-you are always better off just selling the option. 
D) If present value of the dividend payment is large enough,the time value of a European call option can be negative,implying that its price could be less than its intrinsic value. 
A) An American call on a non-dividend-paying stock has the same price as its European counterpart. 
B) The price of any call option on a non-dividend-paying stock always exceeds its intrinsic value. 
C) It is never optimal to exercise a call option on a dividend-paying stock early-you are always better off just selling the option. 
D) If present value of the dividend payment is large enough,the time value of a European call option can be negative,implying that its price could be less than its intrinsic value.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) If the value of the firm's assets exceeds the required debt payment,debt holders are fully repaid. 
B) Another way to view corporate debt: as a portfolio of riskless debt and a short position in a call option on the firm's assets with a strike price equal to the required debt payment. 
C) Viewing debt as an option portfolio is useful as it provides insight into how credit spreads for risky debt are determined. 
D) You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment. 
A) If the value of the firm's assets exceeds the required debt payment,debt holders are fully repaid. 
B) Another way to view corporate debt: as a portfolio of riskless debt and a short position in a call option on the firm's assets with a strike price equal to the required debt payment. 
C) Viewing debt as an option portfolio is useful as it provides insight into how credit spreads for risky debt are determined. 
D) You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment.

Question 20

Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Luther with a strike price of $45.

Accepted Answer

C = P + S - PV(K)- P

Exam 20: Financial Options

Which of the following statements is FALSE?

The maximum value of a one-year American call option on Rearden Metal with a strike price of $60 per share is closest to:

You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share.How much will this transaction cost you and are these contracts in or out of the money?

The payoff to the holder of a call option is given by:

Which of the following statements is FALSE?

How many of the January 2009 call options are in the money?

KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The maximum value of this put option is:

Consider the following equation: C = S - K + dis(K)+ P In this equation,S - K tells us:

Which of the following statements is FALSE?

Consider the following equation: C = P + S - PV(K)- PV(Div) In this equation the term K refers to:

As the seller of an option,you are guaranteed to receive the:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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