Question 1

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 2

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 3

When the exercise price of a call option is lower 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 4

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) -

Question 5

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 6

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 7

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

Accepted Answer

A)  $0 
B)  $32 
C)  $30 
D)  $2 
A)  $0 
B)  $32 
C)  $30 
D)  $2

Question 8

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

The higher the volat

Question 10

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  125% 
B)  130% 
C)  150% 
D)  170% 
A)  125% 
B)  130% 
C)  150% 
D)  170%

Question 11

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 12

When a company writes a call option on new stock in the company, it is called a ________.

Accepted Answer

A)  convertible bond 
B)  put option 
C)  stock option 
D)  warrant 
A)  convertible bond 
B)  put option 
C)  stock option 
D)  warrant

Question 13

Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller 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 14

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 15

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 16

Which of the following is not used in the Black-Scholes option pricing formula?

Accepted Answer

A)  stock price 
B)  dividend yield 
C)  strike price 
D)  risk-free rate 
A)  stock price 
B)  dividend yield 
C)  strike price 
D)  risk-free rate

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  A call option gives the owner the right to buy the asset. 
B)  A put option gives the owner the right to sell the asset. 
C)  A financial options contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date. 
D)  A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price. 
A)  A call option gives the owner the right to buy the asset. 
B)  A put option gives the owner the right to sell the asset. 
C)  A financial options contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date. 
D)  A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.

Question 18

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 19

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 20

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Rackspace.
  
-The open interest for a January 2011 call option that is closest to being at-the-money is ________.

Accepted Answer

A)  1436 
B)  2245 
C)  872 
D)  523 
A)  1436 
B)  2245 
C)  872 
D)  523

Exam 21: Option Applications and Corporate Finance

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

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

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

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

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

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

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

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

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

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.

When a company writes a call option on new stock in the company, it is called a ________.

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

The writer of a call option has ________.

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

Which of the following is not used in the Black-Scholes option pricing formula?

Which of the following statements is FALSE?

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

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

Use the table for the question(s) below. Consider the following information on options from the CBOE for Rackspace. -The open interest for a January 2011 call option that is closest to being at-the-money is ________.

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 .