Question 1

The price at which the holder of an option buys or sells a share of stock when the option is exercised is called the ________ price.

Accepted Answer

A) strike 
B) American 
C) dilutive 
D) none of the above 
A) strike 
B) American 
C) dilutive 
D) none of the above

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  
-How many of the December 2010 put options are in-the-money?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
A) 1 
B) 2 
C) 3 
D) 4

Question 3

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation, what does the term K represent?

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 4

You have shorted a call option on WSJ stock with a strike price of $50. The option will expire in exactly six months. If the stock is trading at $60 in three months, what will you owe for each share in the contract?

Accepted Answer

A) $0 
B) $60 
C) $50 
D) $10 
A) $0 
B) $60 
C) $50 
D) $10

Question 5

The value of a call option ________ with the risk-free rate, and the value of a put option ________ with the risk-free rate.

Accepted Answer

A) increases, increases 
B) decreases, decreases 
C) increases, decreases 
D) decreases, increases 
A) increases, increases 
B) decreases, decreases 
C) increases, decreases 
D) decreases, increases

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price, he is exercising the option. 
B) There are two kinds of options. European options allow their holders to exercise the option on any date up to and including a final date called the expiration date. 
C) Because an option is a contract between two parties, for every owner of a financial option, there is also an option writer, the person who takes the other side of the contract. 
D) The price at which the holder buys or sells the share of stock when the option is exercised is called the strike price or exercise price. 
A) When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price, he is exercising the option. 
B) There are two kinds of options. European options allow their holders to exercise the option on any date up to and including a final date called the expiration date. 
C) Because an option is a contract between two parties, for every owner of a financial option, there is also an option writer, the person who takes the other side of the contract. 
D) The price at which the holder buys or sells the share of stock when the option is exercised is called the strike price or exercise price.

Question 7

A European option on a stock is more valuable than an otherwise similar American option on the same stock.

Accepted Answer

A) True 
 B)False

Question 8

For every owner of a call option there is also an option writer, the person who takes the other side.

Accepted Answer

A) True 
 B)False

Question 9

When the exercise price of an option is equal to the current price of the stock, the option is said to be ________.

Accepted Answer

A) at-the-money 
B) in-the-money 
C) out-of-the-money 
D) none of the above 
A) at-the-money 
B) in-the-money 
C) out-of-the-money 
D) none of the above

Question 10

What is a put option?

Accepted Answer

A put option gives the owner t

Question 11

A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.

Accepted Answer

A) True 
 B)False

Question 12

The payoff to the holder of a call option is ________.

Accepted Answer

A) strike price minus stock price if stock price is more than strike price 
B) strike price minus stock price if stock price is less than strike price 
C) stock price minus strike price if stock price is less than strike price 
D) stock price minus strike price if stock price is more than strike price 
A) strike price minus stock price if stock price is more than strike price 
B) strike price minus stock price if stock price is less than strike price 
C) stock price minus strike price if stock price is less than strike price 
D) stock price minus strike price if stock price is more than strike price

Question 13

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-Assume you want to buy one options contract that with an exercise price closest to being at-the-money and that expires January 2009. The current price that you would have to pay for such a contract is ________.

Accepted Answer

A) $680 
B) $380 
C) $650 
D) $420 
A) $680 
B) $380 
C) $650 
D) $420

Question 14

The Black-Scholes formula is notable because it does not require us to know ________.

Accepted Answer

A) the expected return on a stock 
B) the risk-free rate 
C) the volatility of the stock 
D) the dividend rate on the stock 
A) the expected return on a stock 
B) the risk-free rate 
C) the volatility of the stock 
D) the dividend rate on the stock

Question 15

Options are also called derivative assets because they derive their value solely from the price of another asset.

Accepted Answer

A) True 
 B)False

Question 16

Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a call option if the option strike price is $50.

Accepted Answer

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

Question 17

Rose Industries is currently trading for $47 per share. The stock pays no dividends. A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45. If the risk-free interest rate is 6% per year, then calculate the price of a one-year European put option on Luther with a strike price of $45.

Accepted Answer

C = P + S - PV(K)- P

Question 18

The ________ is the total number of contracts of a particular option that have been written and not yet closed.

Accepted Answer

A) mark interest 
B) open interest 
C) turnover 
D) local turnover 
A) mark interest 
B) open interest 
C) turnover 
D) local turnover

Question 19

What are American options?

Accepted Answer

American options, the most com

Question 20

A(n)________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.

Accepted Answer

A) decrease, equity holders 
B) increase, equity holders 
C) decrease, directors 
D) increase, directors 
A) decrease, equity holders 
B) increase, equity holders 
C) decrease, directors 
D) increase, directors

Exam 21: Option Applications and Corporate Finance

The price at which the holder of an option buys or sells a share of stock when the option is exercised is called the ________ price.

Use the table for the question(s)below. Consider the following information on options from the CBOE for Rackspace. RAX 30.09 +0.48 -How many of the December 2010 put options are in-the-money?

Consider the following equation: C = P + S - PV(K)- PV(Div) In this equation, what does the term K represent?

You have shorted a call option on WSJ stock with a strike price of $50. The option will expire in exactly six months. If the stock is trading at $60 in three months, what will you owe for each share in the contract?

The value of a call option ________ with the risk-free rate, and the value of a put option ________ with the risk-free rate.

Which of the following statements is FALSE?

A European option on a stock is more valuable than an otherwise similar American option on the same stock.

For every owner of a call option there is also an option writer, the person who takes the other side.

When the exercise price of an option is equal to the current price of the stock, the option is said to be ________.

What is a put option?

A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.

The payoff to the holder of a call option is ________.

The Black-Scholes formula is notable because it does not require us to know ________.

Options are also called derivative assets because they derive their value solely from the price of another asset.

Suppose that a stock sells at a price of $40 on the expiration date. Compute the payoff to the seller of a call option if the option strike price is $50.

The ________ is the total number of contracts of a particular option that have been written and not yet closed.

What are American options?

A(n)________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.

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 a call option with the risk-free rate, and the value of a put option with the risk-free rate.

A(n) in the volatility of assets of the firm benefits at a cost to debt holders.