Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

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

Question 3

You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share.How much money will you receive and are these contracts in- or out-of-the-money?

Accepted Answer

If you write 5 put option contracts you will receive 5 × 100 (shares per contract)× $5.90 (since you are selling you get bid price)= $2,950.These options are in-the-money since the exercise price is greater than the current market price.

Question 4

Before joining the TSX,the Montreal Exchange traded options on other products.These products were ________.

Accepted Answer

A)  stock indexes (1999), exchange-traded funds (2000), and the U.S. dollar (2005) 
B)  fixed income securities (1991), exchange-traded funds (2000), and the U.S. dollar (2005) 
C)  fixed income securities (1991), stock indexes (1999), and the U.S. dollar (2005) 
D)  fixed income securities (1991), stock indexes (1999), exchange-traded funds (2000), and the U.S. dollar (2005) 
A)  stock indexes (1999), exchange-traded funds (2000), and the U.S. dollar (2005) 
B)  fixed income securities (1991), exchange-traded funds (2000), and the U.S. dollar (2005) 
C)  fixed income securities (1991), stock indexes (1999), and the U.S. dollar (2005) 
D)  fixed income securities (1991), stock indexes (1999), exchange-traded funds (2000), and the U.S. dollar (2005)

Question 5

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called

Accepted Answer

A)  a strangle. 
B)  portfolio insurance. 
C)  a butterfly spread. 
D)  a straddle. 
A)  a strangle. 
B)  portfolio insurance. 
C)  a butterfly spread. 
D)  a straddle.

Question 6

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 7

Which of the following statements is false?

Accepted Answer

A)  The option buyer, also called the option holder, holds the right to exercise the option and has a long position in the contract. 
B)  The market price of the option is also called the exercise price. 
C)  If the payoff from exercising an option immediately is positive, the option is said to be in-the-money. 
D)  As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers. 
A)  The option buyer, also called the option holder, holds the right to exercise the option and has a long position in the contract. 
B)  The market price of the option is also called the exercise price. 
C)  If the payoff from exercising an option immediately is positive, the option is said to be in-the-money. 
D)  As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers.

Question 8

The Montreal Exchange was the first to trade stock options in Canada in ________.

Accepted Answer

A)  1975 
B)  1973 
C)  1971 
D)  1972 
A)  1975 
B)  1973 
C)  1971 
D)  1972

Question 9

The writer of a call option has

Accepted Answer

A)  the obligation to sell a security for a given price. 
B)  the obligation to buy a security for a given price. 
C)  the right to sell a security for a given price. 
D)  the right to buy a security for a given price. 
A)  the obligation to sell a security for a given price. 
B)  the obligation to buy a security for a given price. 
C)  the right to sell a security for a given price. 
D)  the right to buy a security for a given price.

Question 10

The intrinsic value of an option is the value it would have ________.

Accepted Answer

A)  if it approached to its exercise price 
B)  if it approached to its strike price 
C)  if it expired immediately 
D)  if it approached to its fixed price 
A)  if it approached to its exercise price 
B)  if it approached to its strike price 
C)  if it expired immediately 
D)  if it approached to its fixed price

Question 11

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 12

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:  
-The open interest for a January 2009 put option that is closest to being at-the-money is:

Accepted Answer

A)  7,174 
B)  982 
C)  319 
D)  8,422 
A)  7,174 
B)  982 
C)  319 
D)  8,422

Question 13

When the firm's assets are worth ________ the required debt payment,the put is ________; the owner of the put option will therefore exercise the option and receive the difference between the required debt payment and the firm's asset value.

Accepted Answer

A)  less than; in-the-money 
B)  more than; in-the-money 
C)  less than; out-of-the-money 
D)  more than; out-of-the-money 
A)  less than; in-the-money 
B)  more than; in-the-money 
C)  less than; out-of-the-money 
D)  more than; out-of-the-money

Question 14

In Canada,the Montreal Exchange's only broad index option is ________.

Accepted Answer

A)  on the S&P TSX Composite 
B)  on the S&P TSX 60 
C)  on the TSX Ventures 
D)  on the TSX Derivatives 
A)  on the S&P TSX Composite 
B)  on the S&P TSX 60 
C)  on the TSX Ventures 
D)  on the TSX Derivatives

Question 15

The time value of an option is the difference between ________.Because a(n)________ option cannot be worth less than its intrinsic value,it cannot have a negative time value.

Accepted Answer

A)  the current option price and its intrinsic value; American 
B)  the current option price and its intrinsic value; European 
C)  the current option price and its present value; American 
D)  the current option price and its present value; European 
A)  the current option price and its intrinsic value; American 
B)  the current option price and its intrinsic value; European 
C)  the current option price and its present value; American 
D)  the current option price and its present value; European

Question 16

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

Accepted Answer

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

Question 17

Use the figure for the question(s) below.  
-This graph depicts the payoffs of

Accepted Answer

A)  a short position in a put option at expiration. 
B)  a short position in a call option at expiration. 
C)  a long position in a put option at expiration. 
D)  a long position in a call option at expiration. 
A)  a short position in a put option at expiration. 
B)  a short position in a call option at expiration. 
C)  a long position in a put option at expiration. 
D)  a long position in a call option at expiration.

Question 18

From the Law of One Price,the value of any security is determined by ________ an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's ________ at the time of expiration.

Accepted Answer

A)  the current cash flows ; payoff 
B)  the future cash flows ; price 
C)  the present cash flows ; price 
D)  the future cash flows ; payoff 
A)  the current cash flows ; payoff 
B)  the future cash flows ; price 
C)  the present cash flows ; price 
D)  the future cash flows ; payoff

Question 19

Which of the following statements is false?

Accepted Answer

A)  The intrinsic value of an option is the value it would have if it expired immediately. 
B)  A European option cannot be worth less than its American counterpart. 
C)  Put options increase in value as the stock price falls. 
D)  A put option cannot be worth more than its strike price. 
A)  The intrinsic value of an option is the value it would have if it expired immediately. 
B)  A European option cannot be worth less than its American counterpart. 
C)  Put options increase in value as the stock price falls. 
D)  A put option cannot be worth more than its strike price.

Question 20

On the ICE Futures Canada exchange,headquartered in Winnipeg,options on ________ are traded.

Accepted Answer

A)  canola, softwood, and oil 
B)  cattle, feed wheat, and western barley 
C)  beef, red spring wheat and western barley 
D)  canola, feed wheat, and western barley 
A)  canola, softwood, and oil 
B)  cattle, feed wheat, and western barley 
C)  beef, red spring wheat and western barley 
D)  canola, feed wheat, and western barley

Exam 14: Financial Options

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

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

You have decided to sell (write)5 January 2009 put options on Merck with an exercise price of $45 per share.How much money will you receive and are these contracts in- or out-of-the-money?

Before joining the TSX,the Montreal Exchange traded options on other products.These products were ________.

An option strategy in which you hold a long position in both a put and a call option with the same strike price is called

Which of the following statements is false?

The Montreal Exchange was the first to trade stock options in Canada in ________.

The writer of a call option has

The intrinsic value of an option is the value it would have ________.

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

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -The open interest for a January 2009 put option that is closest to being at-the-money is:

When the firm's assets are worth ________ the required debt payment,the put is ________; the owner of the put option will therefore exercise the option and receive the difference between the required debt payment and the firm's asset value.

In Canada,the Montreal Exchange's only broad index option is ________.

The time value of an option is the difference between ________.Because a(n)________ option cannot be worth less than its intrinsic value,it cannot have a negative time value.

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

Use the figure for the question(s) below. -This graph depicts the payoffs of

From the Law of One Price,the value of any security is determined by ________ an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's ________ at the time of expiration.

Which of the following statements is false?

On the ICE Futures Canada exchange,headquartered in Winnipeg,options on ________ are traded.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

When the firm's assets are worth the required debt payment,the put is ; the owner of the put option will therefore exercise the option and receive the difference between the required debt payment and the firm's asset value.

The time value of an option is the difference between .Because a(n) option cannot be worth less than its intrinsic value,it cannot have a negative time value.

From the Law of One Price,the value of any security is determined by an investor receives from owning it.Therefore,before we can assess what an option is worth,we must determine an option's at the time of expiration.