Question 1

When is an option in-the-money?

Accepted Answer

An option is in-the-

Question 2

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 3

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 4

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 call options are in-the-money?

Accepted Answer

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

Question 5

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 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

Luther Industries is currently trading for $27 per share. The stock pays no dividends. A one-year European put option on Luther with a strike price of $30 is currently trading for $2.60. If the risk-free interest rate is 6% per year, then the price of a one-year European call option on Luther with a strike price of $30 will be closest to ________.

Accepted Answer

A)  $1.30 
B)  $7.10 
C)  $2.60 
D)  $1.95 
A)  $1.30 
B)  $7.10 
C)  $2.60 
D)  $1.95

Question 10

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 11

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 12

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 13

The payoff to the holder of a put 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 14

What are European options?

Accepted Answer

European options, allow their

Question 15

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 $20.

Accepted Answer

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

Question 16

An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price at some future date.

Accepted Answer

A)  obligation, right 
B)  right, option 
C)  right, obligation 
D)  option, right 
A)  obligation, right 
B)  right, option 
C)  right, obligation 
D)  option, right

Question 17

When is an option out-the-money?

Accepted Answer

An option is out-the

Question 18

The holder of a put option has ________.

Accepted Answer

A)  the obligation to sell a security for a given price 
B)  the right to buy a security for a given price 
C)  the right to sell a security for a given price 
D)  the obligation to buy a security for a given price 
A)  the obligation to sell a security for a given price 
B)  the right to buy a security for a given price 
C)  the right to sell a security for a given price 
D)  the obligation to buy a security for a given price

Question 19

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 20

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.

Exam 21: Option Applications and Corporate Finance

When is an option in-the-money?

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.

Which of the following statements is FALSE?

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 call options are in-the-money?

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

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

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

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

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 $20.

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

What are European options?

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 $20.

An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price at some future date.

When is an option out-the-money?

The holder of a put option has ________.

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 ________.

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

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

An options contract gives the owner the but not the to buy or sell an asset at a fixed price at some future date.