Question 1

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 an identical American option. 
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 an identical American option. 
C) Put options increase in value as the stock price falls. 
D) A put option cannot be worth more than its strike price.

Question 2

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

Accepted Answer

A) sell 
B) buy 
C) hold 
D) none of the above 
A) sell 
B) buy 
C) hold 
D) none of the above

Question 3

________ options allow the holder to exercise the option on any date up to and including the expiration date.

Accepted Answer

A) Canadian 
B) American 
C) European 
D) None of the above 
A) Canadian 
B) American 
C) European 
D) None of the above

Question 4

Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a put option if the option strike price is $80.

Accepted Answer

A) -$20 
B) -$10 
C) 0 
D) $40 
A) -$20 
B) -$10 
C) 0 
D) $40

Question 5

________ is the relationship between the value of a stock, bond and the call and put options on the same stock and the same exercise price.

Accepted Answer

A) Dividend exclusion 
B) Limit law 
C) Put-call parity 
D) Put option equality 
A) Dividend exclusion 
B) Limit law 
C) Put-call parity 
D) Put option equality

Question 6

The value of an otherwise identical call option is ________ if the stock price is ________.

Accepted Answer

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

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move. 
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price. 
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date. 
A) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move. 
B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price. 
D) European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date.

Question 8

Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a put option if the option strike price is $60.

Accepted Answer

A) $20 
B) $30 
C) $40 
D) $50 
A) $20 
B) $30 
C) $40 
D) $50

Question 9

For a(n)________ put option, the longer the time to expiration, the greater the value of the option, all other things held constant.

Accepted Answer

A) American 
B) European 
C) Asian 
D) A & B 
A) American 
B) European 
C) Asian 
D) A & B

Question 10

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 11

Use the figure for the question below.  
-This graph depicts the payoffs of a ________.

Accepted Answer

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

Question 12

Which of the following will not increase the value of a put option?

Accepted Answer

A) an increase in the time to maturity 
B) a decrease in the stock price 
C) a decrease in the stocks volatility 
D) an increase in the exercise price 
A) an increase in the time to maturity 
B) a decrease in the stock price 
C) a decrease in the stocks volatility 
D) an increase in the exercise price

Question 13

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

Accepted Answer

A) decrease, debt holders 
B) decrease, suppliers 
C) increase, directors 
D) increase, debt holders 
A) decrease, debt holders 
B) decrease, suppliers 
C) increase, directors 
D) increase, debt holders

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets. 
A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C) In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy. 
D) Because the price of equity is increasing with the volatility of the firm's assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets.

Question 15

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 16

Suppose that a stock sells at a price of $60 on the expiration date. Compute the price of a call option if the option strike price is $20.

Accepted Answer

A) $20 
B) $30 
C) $40 
D) $50 
A) $20 
B) $30 
C) $40 
D) $50

Question 17

What effect does volatility of the underlying asset have on the price of the option?

Accepted Answer

The higher the volat

Question 18

When a stock price appreciates by a certain percentage, a call option on the same stock appreciates by a lower percentage amount.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond. 
B) For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money. 
C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D) Because a put is the right to sell the stock, puts with a lower strike price are less valuable. 
A) Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond. 
B) For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money. 
C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D) Because a put is the right to sell the stock, puts with a lower strike price are less valuable.

Question 20

When is an option in-the-money?

Accepted Answer

An option is in-the-

Exam 21: Option Applications and Corporate Finance

Which of the following statements is FALSE?

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

________ options allow the holder to exercise the option on any date up to and including the expiration date.

Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a put option if the option strike price is $80.

________ is the relationship between the value of a stock, bond and the call and put options on the same stock and the same exercise price.

The value of an otherwise identical call option is ________ if the stock price is ________.

Which of the following statements is FALSE?

Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a put option if the option strike price is $60.

For a(n)________ put option, the longer the time to expiration, the greater the value of the option, all other things held constant.

Which of the following statements is FALSE?

Use the figure for the question below. -This graph depicts the payoffs of a ________.

Which of the following will not increase the value of a put option?

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

Which of the following statements is FALSE?

The writer of a call option has ________.

Suppose that a stock sells at a price of $60 on the expiration date. Compute the price of a call option if the option strike price is $20.

What effect does volatility of the underlying asset have on the price of the option?

When a stock price appreciates by a certain percentage, a call option on the same stock appreciates by a lower percentage amount.

Which of the following statements is FALSE?

When is an option in-the-money?

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

The value of an otherwise identical call option is if the stock price is .

Equity holders have an incentive to the volatility of a firm's assets because they benefit from such an increase at a cost to .