Question 1

The difference between an American option and a European option is that the American option:

Accepted Answer

A) has a fixed exercise price while the European exercise price can vary within a small range. 
B) is a right to buy while a European option is an obligation to buy. 
C) has an expiration date while the European option does not. 
D) is written on 100 shares of the underlying security while the European option covers 1,000 shares. 
E) can be exercised at any time up to the expiration date while the European option can only be exercised on the expiration date. 
A) has a fixed exercise price while the European exercise price can vary within a small range. 
B) is a right to buy while a European option is an obligation to buy. 
C) has an expiration date while the European option does not. 
D) is written on 100 shares of the underlying security while the European option covers 1,000 shares. 
E) can be exercised at any time up to the expiration date while the European option can only be exercised on the expiration date.

Question 2

Martha B's has total assets of $1,810.These assets are expected to increase in value to either $1,900 or $2,400 by next year.The company has a pure discount bond outstanding with a face value of $2,000.This bond matures in one year.Currently,U.S.Treasury bills are yielding 5.5 percent.What is the value of the equity in this firm?

Accepted Answer

A) $6.98 
B) $7.24 
C) $6.67 
D) $7.08 
E) $7.89 
A) $6.98 
B) $7.24 
C) $6.67 
D) $7.08 
E) $7.89

Question 3

The act where an owner of an option buys or sells the underlying asset,as is his right,is called ________ the option.

Accepted Answer

A) striking 
B) exercising 
C) opening 
D) splitting 
E) strangling 
A) striking 
B) exercising 
C) opening 
D) splitting 
E) strangling

Question 4

If you consider bondholders to be the owners of a firm,then those bondholders:

Accepted Answer

A) own a call option on the firm with an exercise price equal to the firm's total equity. 
B) own a put option on the firm with an exercise price equal to the firm's total debt. 
C) have written a put option on the firm with an exercise price equal to the firm's total equity. 
D) have written a call option on the firm with an exercise price equal to the firm's total debt. 
E) own a put option on the firm with an exercise price equal to the firm's total assets. 
A) own a call option on the firm with an exercise price equal to the firm's total equity. 
B) own a put option on the firm with an exercise price equal to the firm's total debt. 
C) have written a put option on the firm with an exercise price equal to the firm's total equity. 
D) have written a call option on the firm with an exercise price equal to the firm's total debt. 
E) own a put option on the firm with an exercise price equal to the firm's total assets.

Question 5

You purchased five WXO 30 call option contracts at a quoted price of $.34.What is your total profit on this investment if the price of WXO is $33.60 on the option expiration date?

Accepted Answer

A) $170 
B) $326 
C) $1,630 
D) $1,440 
E) $1,576 
A) $170 
B) $326 
C) $1,630 
D) $1,440 
E) $1,576

Question 6

Suppose XYZ is priced at $125 a share.The 150 call has six months to expiration and is quoted at $.05.Why do you suppose investors would be willing to purchase a call that is so far out of the money?

Accepted Answer

Options have both an intrinsic value and

Question 7

The lower bound of a call option's value:

Accepted Answer

A) can be a negative value regardless of the stock or exercise prices. 
B) can be a negative value but only when the exercise price exceeds the stock price. 
C) can be a negative value but only when the stock price exceeds the exercise price. 
D) must be greater than zero. 
E) can be equal to zero. 
A) can be a negative value regardless of the stock or exercise prices. 
B) can be a negative value but only when the exercise price exceeds the stock price. 
C) can be a negative value but only when the stock price exceeds the exercise price. 
D) must be greater than zero. 
E) can be equal to zero.

Question 8

The assets of Green Light Specials are currently worth $2,100.These assets are expected to be worth either $1,800 or $2,300 one year from now.The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year.The risk-free rate is 5 percent.What is the value of the equity in this firm?

Accepted Answer

A) $166.67 
B) $231.43 
C) $385.71 
D) $405.00 
E) $714.29 
A) $166.67 
B) $231.43 
C) $385.71 
D) $405.00 
E) $714.29

Question 9

Jeff owns an American put option on 100 shares of ABC stock.The option has a strike price of $32.50 and a September expiration date.The stock has recently been declining in value,currently sells for $27.65 per share,and is expected to continue declining in value.Ignore all costs and taxes.If today is Wednesday,August 14,he:

Accepted Answer

A) cannot exercise his option even though he would like to do so. 
B) should hold his option until September. 
C) can exercise his option and earn a profit. 
D) should exercise his option today and then sell the shares of stock on the September expiration date. 
E) should let his option expire unless the stock price increases above $32.50 a share. 
A) cannot exercise his option even though he would like to do so. 
B) should hold his option until September. 
C) can exercise his option and earn a profit. 
D) should exercise his option today and then sell the shares of stock on the September expiration date. 
E) should let his option expire unless the stock price increases above $32.50 a share.

Question 10

A purely financial merger:

Accepted Answer

A) increases shareholder value but does not affect bondholders. 
B) decreases both bondholder and shareholder values. 
C) transfers bondholder value to shareholders. 
D) increases bondholder value but does not affect shareholder value. 
E) reduces shareholder value while increasing bondholder value. 
A) increases shareholder value but does not affect bondholders. 
B) decreases both bondholder and shareholder values. 
C) transfers bondholder value to shareholders. 
D) increases bondholder value but does not affect shareholder value. 
E) reduces shareholder value while increasing bondholder value.

Question 11

Assume the delta of a call option on a firm's assets is .608.This means a project valued at $65,000 will increase the value of the firm's equity by:

Accepted Answer

A) $27,902. 
B) $39,520. 
C) $43,820. 
D) $63,131. 
E) $89,600. 
A) $27,902. 
B) $39,520. 
C) $43,820. 
D) $63,131. 
E) $89,600.

Question 12

The current market value of the assets of Bigelow Inc.is $91 million,with a standard deviation of 19 percent per year.The firm has zero-coupon bonds outstanding with a total face value of $45 million.These bonds mature in 2 years.The risk-free rate is 4 percent per year compounded continuously.What is the value of d1?

Accepted Answer

A) 3.05 
B) 3.62 
C) 2.48 
D) 2.71 
E) 3.46 
A) 3.05 
B) 3.62 
C) 2.48 
D) 2.71 
E) 3.46

Question 13

Given the following information,what is the value of d2 as it is used in the Black-Scholes model?

Accepted Answer

A) .0216 
B) −.8034 
C) .1756 
D) −.20021 
E) .0251 
A) .0216 
B) −.8034 
C) .1756 
D) −.20021 
E) .0251

Question 14

What are the upper and lower bounds of an American call option? Explain what would happen in each case if the bound was violated.

Accepted Answer

The upper bound on a call is the stock p

Question 15

What is the cost of four October 40 put option contracts on a stock given the following price quotes?

Accepted Answer

A) $22 
B) $26 
C) $240 
D) $88 
E) $104 
A) $22 
B) $26 
C) $240 
D) $88 
E) $104

Question 16

For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if 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 17

You purchased five CVB call option contracts with a strike price of $40 when the option was quoted at $3.65.The option expires today when the value of CVB stock is $43.Ignoring trading costs and taxes,what is your total profit on your investment?

Accepted Answer

A) $0 
B) −$325 
C) $800 
D) $1,500 
E) −$1,825 
A) $0 
B) −$325 
C) $800 
D) $1,500 
E) −$1,825

Question 18

You own one call option with an exercise price of $30 on Nadia stock.This stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year.The risk-free rate of return is 5 percent.What is the current per share value of your option if it expires in one year?

Accepted Answer

A) $.76 
B) $.79 
C) $.89 
D) $.92 
E) $.95 
A) $.76 
B) $.79 
C) $.89 
D) $.92 
E) $.95

Question 19

The market price of ABC stock has been very volatile and you think this volatility will continue for several weeks.Thus,you decide to purchase one two-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30.You also purchase one two-month put option on ABC stock with a strike price of $25 and an option price of $.50.What will be your total profit on these positions if the stock price is $25.60 on the day the options expire?

Accepted Answer

A) −$180 
B) −$120 
C) $100 
D) $120 
E) $180 
A) −$180 
B) −$120 
C) $100 
D) $120 
E) $180

Question 20

The common stock of WIN is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the per share value of one call option on WIN stock with an exercise price of $55?

Accepted Answer

A) $.39 
B) $.41 
C) $.45 
D) $.48 
E) $.51 
A) $.39 
B) $.41 
C) $.45 
D) $.48 
E) $.51

Exam 22: Options and Corporate Finance

The difference between an American option and a European option is that the American option:

The act where an owner of an option buys or sells the underlying asset,as is his right,is called ________ the option.

If you consider bondholders to be the owners of a firm,then those bondholders:

You purchased five WXO 30 call option contracts at a quoted price of $.34.What is your total profit on this investment if the price of WXO is $33.60 on the option expiration date?

Suppose XYZ is priced at $125 a share.The 150 call has six months to expiration and is quoted at $.05.Why do you suppose investors would be willing to purchase a call that is so far out of the money?

The lower bound of a call option's value:

A purely financial merger:

Assume the delta of a call option on a firm's assets is .608.This means a project valued at $65,000 will increase the value of the firm's equity by:

Given the following information,what is the value of d2 as it is used in the Black-Scholes model?

What are the upper and lower bounds of an American call option? Explain what would happen in each case if the bound was violated.

What is the cost of four October 40 put option contracts on a stock given the following price quotes?

For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:

You purchased five CVB call option contracts with a strike price of $40 when the option was quoted at $3.65.The option expires today when the value of CVB stock is $43.Ignoring trading costs and taxes,what is your total profit on your investment?

The common stock of WIN is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the per share value of one call option on WIN stock with an exercise price of $55?

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

Given the following information,what is the value of d₂ as it is used in the Black-Scholes model?