Question 1

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

Accepted Answer

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

Question 2

Although the payouts on a long position in an options contract are never negative, the profit from purchasing and holding it could be negative.

Accepted Answer

A) True 
 B)False  True

Question 3

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 A

Question 4

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 5

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 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

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 8

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 9

When is an option at-the-money?

Accepted Answer

An option is at-the-money when

Question 10

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 11

________ 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 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 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 14

What is the long position of an options contract?

Accepted Answer

The option buyer or

Question 15

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 16

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 17

________ options allow the holder to exercise the option only on 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 18

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 19

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.

Question 20

According to put-call parity, which of the following would cause the value of a call option to decrease?

Accepted Answer

A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put price 
A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put price

Exam 21: Option Applications and Corporate Finance

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

Although the payouts on a long position in an options contract are never negative, the profit from purchasing and holding it could be negative.

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

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

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

When is an option at-the-money?

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

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

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

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

What is the long position of an options contract?

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 ________.

Which of the following statements is FALSE?

________ options allow the holder to exercise the option only on the expiration date.

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

Which of the following statements is FALSE?

According to put-call parity, which of the following would cause the value of a call option to decrease?

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 American call option is if the exercise date is .