Question 1

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

Accepted Answer

A) True 
 B)False

Question 2

Suppose you are looking to exploit opportunities in the options markets. The price of a call option on Apple computers with a maturity of one year and strike price $150 is $15, and the price of the stock is $140. What should the price of a put option be to preclude profitable opportunities? The risk-free rate of interest is 5%.

Accepted Answer

A) $21.45 
B) $17.86 
C) $25.00 
D) $19.63 
A) $21.45 
B) $17.86 
C) $25.00 
D) $19.63

Question 3

An investor purchases a call option and its underlying stock on the same day. If the stock appreciates by 25%, the call option will appreciate by ________.

Accepted Answer

A) more than 25% 
B) less than 25% 
C) exactly 25% 
D) none of the above 
A) more than 25% 
B) less than 25% 
C) exactly 25% 
D) none of the above

Question 4

A protective put written on a portfolio (rather than a single stock)is known as ________.

Accepted Answer

A) portfolio insurance 
B) put-call parity 
C) a warrant 
D) Black-Scholes 
A) portfolio insurance 
B) put-call parity 
C) a warrant 
D) Black-Scholes

Question 5

When the exercise price of a call option is higher than 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 6

The value of an option ________ with the volatility of the underlying stock.

Accepted Answer

A) increases 
B) decreases 
C) unchanged 
D) cannot say for sure 
A) increases 
B) decreases 
C) unchanged 
D) cannot say for sure

Question 7

What is the short position of an options contract?

Accepted Answer

The option seller or writer is

Question 8

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

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 9

Using options to place a bet on the direction in which you believe the market is likely to move is called ________.

Accepted Answer

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

Question 10

Suppose that a stock sells at a price of $40 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 11

The value of an otherwise identical call option is ________ if the strike price the holder must pay to buy the stock is ________.

Accepted Answer

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

Question 12

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

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

Question 13

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Rackspace.
RAX 30.09 +0.48  
-Assume you want to buy five call option contracts that with an exercise price closest to being at-the-money and that expires December 2010. The current price that you would have to pay for such a contract is ________.

Accepted Answer

A) $550 
B) $110 
C) $475 
D) $300 
A) $550 
B) $110 
C) $475 
D) $300

Question 14

For a(n)________ put option, the higher the stock price, the lower the value of the option

Accepted Answer

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

Question 15

What is a call option?

Accepted Answer

A call option gives the owner

Question 16

KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The intrinsic value of this put option is ________.

Accepted Answer

A) $0 
B) -$2 
C) $2 
D) $30 
A) $0 
B) -$2 
C) $2 
D) $30

Question 17

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 18

Suppose that a stock sells at a price of $50 on the expiration date. Compute the price of a put option if the option strike price is $80.

Accepted Answer

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

Question 19

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 $20.

Accepted Answer

A) $0 
B) $10 
C) $20 
D) $30 
A) $0 
B) $10 
C) $20 
D) $30

Question 20

Use the table for the question(s)below.
Consider the following information on options from the CBOE for Merck:  
-How many of the January 2009 put options are in-the-money?

Accepted Answer

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

Exam 21: Option Applications and Corporate Finance

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

An investor purchases a call option and its underlying stock on the same day. If the stock appreciates by 25%, the call option will appreciate by ________.

A protective put written on a portfolio (rather than a single stock)is known as ________.

When the exercise price of a call option is higher than the current price of the stock, the option is said to be ________.

The value of an option ________ with the volatility of the underlying stock.

What is the short position of an options contract?

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

Using options to place a bet on the direction in which you believe the market is likely to move is called ________.

Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a call option if the option strike price is $20.

The value of an otherwise identical call option is ________ if the strike price the holder must pay to buy the stock is ________.

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

For a(n)________ put option, the higher the stock price, the lower the value of the option

What is a call option?

KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The intrinsic value of this put option is ________.

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 ________.

Suppose that a stock sells at a price of $50 on the expiration date. Compute the price of a put option if the option strike price is $80.

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 $20.

Use the table for the question(s)below. Consider the following information on options from the CBOE for Merck: -How many of the January 2009 put options are 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 strike price the holder must pay to buy the stock is .