Exam 22: Options and Corporate Finance

Suppose your wealthy Aunt Minnie has asked you to manage her large stock portfolio.You would like to use options to increase her total return and also reduce her risks.Describe the types of options you would buy or sell,as well as your rationale,given the following circumstances: ∙ Aunt Minnie owns 10,000 shares of a large oil company common stock.You believe the stock is overpriced,but she won't let you sell any shares because her late husband told her to never,ever sell any.How do you protect her from what you believe is an impending price decline? ∙ Your analysis suggests that a technology stock is poised for a large price increase within the next year.Aunt Minnie won't agree to spend the dollars required to obtain shares but has consented to allow you to spend some money on options but only because she trusts you.You don't want to disappoint her.What should you do?

You own a call option on Jasper Co.stock that expires in one year.The exercise price is $35.The current price of the stock is $48 and the risk-free rate of return is 4.5 percent.Assume the option will finish in the money.What is the current value of the call option per share?

Which one of the following statements concerning call option writers is true?

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

Tru-U stock is selling for $41 a share.A 6-month call on Tru-U stock with a strike price of $45 is priced at $1.60.Risk-free assets are currently returning .29 percent per month.What is the price of a 6-month put on Tru-U stock with a strike price of $45?

Selling a covered call is equivalent to:

What is the value of one August 25 call option contract?

A put option on ABC stock with an exercise price of $35 expires today.The current price of ABC stock is $36.The put is:

On the expiration day,the maximum price of a put option on a stock is the greater of the:

You sold a put contract on EDF stock at an option price of $.25 and an exercise price of $22.50.The option expires today when EDF stock is selling for $21.70 a share.Ignoring transaction costs and taxes,what is your total profit on this investment?

Which one of the following statements is correct concerning in-the-money option values?

The maximum value of a call option is equal to the:

In the Black-Scholes option pricing formula,N(d₁)is the probability that a standardized,normally distributed random variable is:

The value of an option if it were to immediately expire,that is,its lower pricing bound,is called an option's ________ value.

All else held constant,the value of a call decreases when the:

How do options apply to capital budgeting? Explain and provide an example.

Suppose you look in the newspaper and see ABC trading at $50 per share.Calls on ABC with one month to expiration and an exercise price of $45 are trading at $6.50 each.Puts on ABC with one month to expiration and an exercise price of $55 are trading at $3.50 each.Are these prices reasonable? Explain.(Ignore transactions costs.)

Given an exercise price,time to maturity,and European put-call parity,the present value of the strike price plus the price of the call option is equal to the:

Assume you are reviewing a table that lists the current stock option contracts and quotes.Which one of these statements would correctly apply to that table?

GSX stock is selling for $32.40 a share.A 4-month call on GSX stock with a strike price of $35 is priced at $.55.Risk-free assets are currently returning .3 percent per month.What is the price of a 4-month put on GSX stock with a strike price of $35?