Question 1

What is the value of d2 given the following information?

Accepted Answer

A) .0133 
B) −.0189 
C) −.0460 
D) .0867 
E) −.0019 
A) .0133 
B) −.0189 
C) −.0460 
D) .0867 
E) −.0019 B

Question 2

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's:

Accepted Answer

A) opening price. 
B) intrinsic value. 
C) strike price. 
D) market price. 
E) time value. 
A) opening price. 
B) intrinsic value. 
C) strike price. 
D) market price. 
E) time value. C

Question 3

You purchased eight TJH call option contracts with a strike price of $37.50 when the option quote was $.55.The option expires today when the value of TJH stock is $37.10.Ignoring trading costs and taxes,what is your total profit on your investment?

Accepted Answer

A) $0 
B) −$120 
C) −$440 
D) $420 
E) $760 
A) $0 
B) −$120 
C) −$440 
D) $420 
E) $760 C

Question 4

You own stock in a firm that has a pure discount loan due in six months.The loan has a face value of $50,000.The assets of the firm are currently worth $62,000.The stockholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________

Accepted Answer

A) put; $62,000. 
B) put; $50,000. 
C) warrant; $62,000. 
D) call; $62,000. 
E) call; $50,000. 
A) put; $62,000. 
B) put; $50,000. 
C) warrant; $62,000. 
D) call; $62,000. 
E) call; $50,000.

Question 5

An option that may be exercised only on the expiration date is called a(n)________ option.

Accepted Answer

A) European 
B) American 
C) Bermudian 
D) futures 
E) Asian 
A) European 
B) American 
C) Bermudian 
D) futures 
E) Asian

Question 6

The effect on an option's value of a small change in the value of the underlying asset is called the option:

Accepted Answer

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

Question 7

The lower bound on a call's value is defined as the:

Accepted Answer

A) greater of the strike price or zero. 
B) greater of the stock price minus the exercise price or zero. 
C) lesser of the strike price or the stock price. 
D) lesser of the strike price or zero. 
E) lesser of the stock price minus the exercise price or zero. 
A) greater of the strike price or zero. 
B) greater of the stock price minus the exercise price or zero. 
C) lesser of the strike price or the stock price. 
D) lesser of the strike price or zero. 
E) lesser of the stock price minus the exercise price or zero.

Question 8

You own two call option contracts on ABC stock with a strike price of $15.When you purchased the contracts the option price was $1.20 and the stock price was $15.90.What is the total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?

Accepted Answer

A) $280 
B) $180 
C) $100 
D) $0 
E) $29 
A) $280 
B) $180 
C) $100 
D) $0 
E) $29

Question 9

Assume you are reviewing a table that lists the current stock option contracts and quotes.On a specific contract the table shows an option interest value of 38 and volume of 9.This means that:

Accepted Answer

A) 9 contracts were exercised on that day while 38 more were traded. 
B) 38 contracts were traded on that day compared to only 9 traded on the previous day. 
C) 9 contracts were traded on that day at a price of $.38 per share. 
D) 38 contracts were traded on that day at the bid price and 9 were traded at the ask price. 
E) 9 of the 38 outstanding contracts traded on that day. 
A) 9 contracts were exercised on that day while 38 more were traded. 
B) 38 contracts were traded on that day compared to only 9 traded on the previous day. 
C) 9 contracts were traded on that day at a price of $.38 per share. 
D) 38 contracts were traded on that day at the bid price and 9 were traded at the ask price. 
E) 9 of the 38 outstanding contracts traded on that day.

Question 10

Which of these will increase the value of a call option? I.An increase in the market value of the underlying asset
II.An increase in the option's strike price
III.A decrease in the market value of the underlying asset
IV.A decrease in the option's strike price

Accepted Answer

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

Question 11

Assume you purchase one share of a stock and sell a call option on a single share of that same stock with an exercise price of $25.What is the maximum payoff you can realize on this combination?

Accepted Answer

A) The exercise price of $25 
B) An amount equal to the stock price on the option expiration date 
C) An amount equal to $25 minus the stock price on the option expiration date 
D) An amount equal to the stock price on the expiration date plus $25 
E) Zero 
A) The exercise price of $25 
B) An amount equal to the stock price on the option expiration date 
C) An amount equal to $25 minus the stock price on the option expiration date 
D) An amount equal to the stock price on the expiration date plus $25 
E) Zero

Question 12

Assume you own both a May 40 put and a May 40 call on ABC stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

Accepted Answer

A) An increase in the stock price will increase the value of your put and decrease the value of your call. 
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options. 
C) The time premiums on both your put and call are less than the time premiums on equivalent June options. 
D) A decrease in the stock price will decrease the value of both of your options. 
E) You can never profit on your positions as your profits on one option will be offset by losses on the other option. 
A) An increase in the stock price will increase the value of your put and decrease the value of your call. 
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options. 
C) The time premiums on both your put and call are less than the time premiums on equivalent June options. 
D) A decrease in the stock price will decrease the value of both of your options. 
E) You can never profit on your positions as your profits on one option will be offset by losses on the other option.

Question 13

Alicia is considering purchasing a small building with the intent of opening a craft and sewing center.The cost of the building is $49,000 and the cost to open the center is an additional $150,000.If the center is opened and no other competition is nearby the project will provide a hefty return.However,should the vacant building down the street be used for a competitive type entity,then the center could be a losing proposition.Assume the building is purchased but the opening of the center is delayed.This situation would best be described as ________ on a craft and sewing center.

Accepted Answer

A) purchasing a call option 
B) writing a call option 
C) purchasing a put option 
D) writing a put option 
E) exercising a call on the land and writing a put 
A) purchasing a call option 
B) writing a call option 
C) purchasing a put option 
D) writing a put option 
E) exercising a call on the land and writing a put

Question 14

Put-call parity can be used to show:

Accepted Answer

A) how far in-the-money put options can be. 
B) how far in-the-money call options can be. 
C) the precise relationship between put and call prices given equal exercise prices and equal expiration dates. 
D) that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates. 
E) that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates. 
A) how far in-the-money put options can be. 
B) how far in-the-money call options can be. 
C) the precise relationship between put and call prices given equal exercise prices and equal expiration dates. 
D) that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates. 
E) that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates.

Question 15

You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an option price of $1.20.Today,the option expires and the underlying stock is selling for $33 a share.Ignoring trading costs and taxes,what is your total profit on this investment?

Accepted Answer

A) −$3,300 
B) −$1,200 
C) $120 
D) $1,200 
E) $3,300 
A) −$3,300 
B) −$1,200 
C) $120 
D) $1,200 
E) $3,300

Question 16

The owner of a European put option has the:

Accepted Answer

A) right,but not the obligation,to sell the underlying asset at the specified price only on the specified date. 
B) right,but not the obligation,to sell the underlying asset at the specified price during a specified period of time. 
C) obligation to sell the underlying asset on the specified date,but only if they can do so at the specified price. 
D) obligation to buy the underlying asset sometime during the specified period at the specified price. 
E) right,but not the obligation,to buy the underlying asset at the exercise price on the expiration date. 
A) right,but not the obligation,to sell the underlying asset at the specified price only on the specified date. 
B) right,but not the obligation,to sell the underlying asset at the specified price during a specified period of time. 
C) obligation to sell the underlying asset on the specified date,but only if they can do so at the specified price. 
D) obligation to buy the underlying asset sometime during the specified period at the specified price. 
E) right,but not the obligation,to buy the underlying asset at the exercise price on the expiration date.

Question 17

An option that may be exercised at any time up to and including its expiration date is called a(n)________ option.

Accepted Answer

A) futures 
B) Asian 
C) Bermudian 
D) European 
E) American 
A) futures 
B) Asian 
C) Bermudian 
D) European 
E) American

Question 18

You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60.What is your total profit on this investment if the price of JIG is $46.05 on the option expiration date?

Accepted Answer

A) −$5,050 
B) −$4,450 
C) $4,100 
D) $4,450 
E) $5,050 
A) −$5,050 
B) −$4,450 
C) $4,100 
D) $4,450 
E) $5,050

Question 19

You can realize the same value as that derived from stock ownership if you:

Accepted Answer

A) sell a put option and invest at the risk-free rate of return. 
B) buy a call option and write a put option on a stock and also borrow funds at the risk-free rate. 
C) sell a put,buy a call,and buy a zero-coupon bond. 
D) lend out funds at the risk-free rate of return and sell a put option on the stock. 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options. 
A) sell a put option and invest at the risk-free rate of return. 
B) buy a call option and write a put option on a stock and also borrow funds at the risk-free rate. 
C) sell a put,buy a call,and buy a zero-coupon bond. 
D) lend out funds at the risk-free rate of return and sell a put option on the stock. 
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

Question 20

An option that grants the right,but not the obligation,to sell shares of the underlying asset during a particular time period at a specified price is called:

Accepted Answer

A) either an American or a European option. 
B) an American call option. 
C) an American put option. 
D) a European put option. 
E) a European call option. 
A) either an American or a European option. 
B) an American call option. 
C) an American put option. 
D) a European put option. 
E) a European call option.

Exam 22: Options and Corporate Finance

What is the value of d2 given the following information?

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's:

You purchased eight TJH call option contracts with a strike price of $37.50 when the option quote was $.55.The option expires today when the value of TJH stock is $37.10.Ignoring trading costs and taxes,what is your total profit on your investment?

You own stock in a firm that has a pure discount loan due in six months.The loan has a face value of $50,000.The assets of the firm are currently worth $62,000.The stockholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________

An option that may be exercised only on the expiration date is called a(n)________ option.

The effect on an option's value of a small change in the value of the underlying asset is called the option:

The lower bound on a call's value is defined as the:

You own two call option contracts on ABC stock with a strike price of $15.When you purchased the contracts the option price was $1.20 and the stock price was $15.90.What is the total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?

Assume you are reviewing a table that lists the current stock option contracts and quotes.On a specific contract the table shows an option interest value of 38 and volume of 9.This means that:

Which of these will increase the value of a call option? I.An increase in the market value of the underlying asset II.An increase in the option's strike price III.A decrease in the market value of the underlying asset IV.A decrease in the option's strike price

Assume you purchase one share of a stock and sell a call option on a single share of that same stock with an exercise price of $25.What is the maximum payoff you can realize on this combination?

Assume you own both a May 40 put and a May 40 call on ABC stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

Put-call parity can be used to show:

You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an option price of $1.20.Today,the option expires and the underlying stock is selling for $33 a share.Ignoring trading costs and taxes,what is your total profit on this investment?

The owner of a European put option has the:

An option that may be exercised at any time up to and including its expiration date is called a(n)________ option.

You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60.What is your total profit on this investment if the price of JIG is $46.05 on the option expiration date?

You can realize the same value as that derived from stock ownership if you:

An option that grants the right,but not the obligation,to sell shares of the underlying asset during a particular time period at a specified price is called:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

What is the value of d₂ given the following information?

You own stock in a firm that has a pure discount loan due in six months.The loan has a face value of $50,000.The assets of the firm are currently worth $62,000.The stockholders in this firm basically own a option on the assets of the firm with a strike price of