Question 1

Which of the following statements is FALSE?

Accepted Answer

A)  The option buyer, also called the option holder, holds the right to exercise the option and has a long position in the contract. 
B)  The market price of the option is also called the exercise price. 
C)  If the payoff from exercising an option immediately is positive, the option is said to be in-the-money. 
D)  As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers. 
A)  The option buyer, also called the option holder, holds the right to exercise the option and has a long position in the contract. 
B)  The market price of the option is also called the exercise price. 
C)  If the payoff from exercising an option immediately is positive, the option is said to be in-the-money. 
D)  As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers.

Question 2

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 3

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 4

What is a call option?

Accepted Answer

A call option gives the owner

Question 5

Debt holders can be thought of as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.

Accepted Answer

A)  written, face value of debt 
B)  bought, face value of debt 
C)  written, value of equity 
D)  bought, value of equity 
A)  written, face value of debt 
B)  bought, face value of debt 
C)  written, value of equity 
D)  bought, value of equity

Question 6

Which of the following will not increase the value of a put option?

Accepted Answer

A)  an increase in the time to maturity 
B)  a decrease in the stock price 
C)  a decrease in the stocks volatility 
D)  an increase in the exercise price 
A)  an increase in the time to maturity 
B)  a decrease in the stock price 
C)  a decrease in the stocks volatility 
D)  an increase in the exercise price

Question 7

Suppose that a stock sells at a price of $60 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 8

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 $20.

Accepted Answer

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

Question 9

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Rackspace.
  
-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 10

Use the figure for the question below.  
-You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00. Three months later, at expiration, Luther Industries is trading at $41.00 per share. Your profit per share on this transaction is closest to ________.

Accepted Answer

A)  -$1.00 
B)  $1.00 
C)  -$2.25 
D)  $2.25 
A)  -$1.00 
B)  $1.00 
C)  -$2.25 
D)  $2.25

Question 11

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 $80.

Accepted Answer

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

Question 12

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 13

In case of normal swings in the risk-free rate, option prices are not very sensitive to changes in the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Suppose you purchase a call option for $5 and a strike price of $40. On the expiration day, the price of the stock is $55. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  125% 
B)  200% 
C)  275% 
D)  300% 
A)  125% 
B)  200% 
C)  275% 
D)  300%

Question 16

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 17

When you purchase a put option while still holding the underlying stock, it is known as a ________.

Accepted Answer

A)  protective put 
B)  protective call 
C)  speculative put 
D)  speculative call 
A)  protective put 
B)  protective call 
C)  speculative put 
D)  speculative call

Question 18

Using options to reduce risk is called ________.

Accepted Answer

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

Question 19

A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.

Accepted Answer

A)  put option, face value of debt 
B)  call option, market value of equity 
C)  call option, face value of debt 
D)  put option, market value of equity 
A)  put option, face value of debt 
B)  call option, market value of equity 
C)  call option, face value of debt 
D)  put option, market value of equity

Question 20

Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.

Accepted Answer

A)  hedging, speculation 
B)  hedging, verification 
C)  verification, hedging 
D)  speculation, hedging 
A)  hedging, speculation 
B)  hedging, verification 
C)  verification, hedging 
D)  speculation, hedging

Exam 21: Option Applications and Corporate Finance

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.

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 ________.

What is a call option?

Debt holders can be thought of as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.

Which of the following will not increase the value of a put option?

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

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 $20.

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 $80.

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

In case of normal swings in the risk-free rate, option prices are not very sensitive to changes in the risk-free rate.

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 you purchase a call option for $5 and a strike price of $40. On the expiration day, the price of the stock is $55. What is the return on the call option if you hold your position until maturity?

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

When you purchase a put option while still holding the underlying stock, it is known as a ________.

Using options to reduce risk is called ________.

A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.

Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.

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

Debt holders can be thought of as owning the firm but having a call option on the assets of the firm with a strike price equal to .

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

A share of stock is a option on the assets of the firm with a strike price equal to .

Using an option to reduce the risk of a portfolio is called , while using options to bet on the direction of the market or an asset is called .