Question 1

When a company writes a call option on new stock in the company, it is called a ________.

Accepted Answer

A) convertible bond 
B) put option 
C) stock option 
D) warrant 
A) convertible bond 
B) put option 
C) stock option 
D) warrant

Question 2

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Rackspace.
RAX 30.09 +0.48  
-The open interest for a January 2011 call option that is closest to being at-the-money is ________.

Accepted Answer

A) 1436 
B) 2245 
C) 872 
D) 523 
A) 1436 
B) 2245 
C) 872 
D) 523

Question 3

In case of normal swings in the risk-free rate, option prices are not very sensitive to changes in the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 4

The Black-Scholes formula gives the price of an American call option.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value. 
B) An American option with a later exercise date is of more worth than an otherwise identical American option with an earlier exercise date. 
C) The value of an option generally decreases with the volatility of the stock. 
D) The investor holding a short position in an option has an obligation; he or she takes the opposite side of the contract to the investor who holds the long position. 
A) Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value. 
B) An American option with a later exercise date is of more worth than an otherwise identical American option with an earlier exercise date. 
C) The value of an option generally decreases with the volatility of the stock. 
D) The investor holding a short position in an option has an obligation; he or she takes the opposite side of the contract to the investor who holds the long position.

Question 6

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

Accepted Answer

A) True 
 B)False

Question 7

Debt holders can be thought of as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.

Accepted Answer

A) written, face value of debt 
B) bought, face value of debt 
C) written, value of equity 
D) bought, value of equity 
A) written, face value of debt 
B) bought, face value of debt 
C) written, value of equity 
D) bought, value of equity

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) A call option gives the owner the right to buy the asset. 
B) A put option gives the owner the right to sell the asset. 
C) A financial options contract gives the writer the right (but not the obligation)to purchase or sell an asset at a fixed price at some future date. 
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price. 
A) A call option gives the owner the right to buy the asset. 
B) A put option gives the owner the right to sell the asset. 
C) A financial options contract gives the writer the right (but not the obligation)to purchase or sell an asset at a fixed price at some future date. 
D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.

Question 9

Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the stock is $30. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A) 25% 
B) 50% 
C) 75% 
D) 100% 
A) 25% 
B) 50% 
C) 75% 
D) 100%

Question 10

The ________ side of an options contract has the option to exercise, while the ________ side has an obligation to fulfill the contract.

Accepted Answer

A) long, long 
B) short, long 
C) long, short 
D) short, short 
A) long, long 
B) short, long 
C) long, short 
D) short, short

Question 11

When is an option out-the-money?

Accepted Answer

An option is out-the

Question 12

Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.

Accepted Answer

A) hedging, speculation 
B) hedging, verification 
C) verification, hedging 
D) speculation, hedging 
A) hedging, speculation 
B) hedging, verification 
C) verification, hedging 
D) speculation, hedging

Question 13

Which of the following is not used in the Black-Scholes option pricing formula?

Accepted Answer

A) stock price 
B) dividend yield 
C) strike price 
D) risk-free rate 
A) stock price 
B) dividend yield 
C) strike price 
D) risk-free rate

Question 14

A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.

Accepted Answer

A) put option, face value of debt 
B) call option, market value of equity 
C) call option, face value of debt 
D) put option, market value of equity 
A) put option, face value of debt 
B) call option, market value of equity 
C) call option, face value of debt 
D) put option, market value of equity

Question 15

The value of an otherwise identical American call option is ________ if the exercise date is ________.

Accepted Answer

A) higher, longer 
B) lower, longer 
C) higher, closer 
D) none of the above 
A) higher, longer 
B) lower, longer 
C) higher, closer 
D) none of the above

Question 16

Using options to reduce risk is called ________.

Accepted Answer

A) speculation 
B) a naked position 
C) hedging 
D) a covered position 
A) speculation 
B) a naked position 
C) hedging 
D) a covered position

Question 17

When you purchase a put option while still holding the underlying stock, it is known as a ________.

Accepted Answer

A) protective put 
B) protective call 
C) speculative put 
D) speculative call 
A) protective put 
B) protective call 
C) speculative put 
D) speculative call

Question 18

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A) 125% 
B) 130% 
C) 150% 
D) 170% 
A) 125% 
B) 130% 
C) 150% 
D) 170%

Question 19

What are European options?

Accepted Answer

European options, allow their

Question 20

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.

Exam 21: Option Applications and Corporate Finance

When a company writes a call option on new stock in the company, it is called a ________.

Use the table for the question(s)below. Consider the following information on options from the CBOE for Rackspace. RAX 30.09 +0.48 -The open interest for a January 2011 call option that is closest to being at-the-money is ________.

In case of normal swings in the risk-free rate, option prices are not very sensitive to changes in the risk-free rate.

The Black-Scholes formula gives the price of an American call option.

Which of the following statements is FALSE?

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

Debt holders can be thought of as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.

Which of the following statements is FALSE?

Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the stock is $30. What is the return on the call option if you hold your position until maturity?

The ________ side of an options contract has the option to exercise, while the ________ side has an obligation to fulfill the contract.

When is an option out-the-money?

Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.

Which of the following is not used in the Black-Scholes option pricing formula?

A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.

The value of an otherwise identical American call option is ________ if the exercise date is ________.

Using options to reduce risk is called ________.

When you purchase a put option while still holding the underlying stock, it is known as a ________.

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

What are European options?

Which of the following statements is FALSE?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Debt holders can be thought of as owning the firm but having a call option on the assets of the firm with a strike price equal to .

The side of an options contract has the option to exercise, while the side has an obligation to fulfill the contract.

Using an option to reduce the risk of a portfolio is called , while using options to bet on the direction of the market or an asset is called .

A share of stock is a option on the assets of the firm with a strike price equal to .

The value of an otherwise identical American call option is if the exercise date is .