Question 1

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Accepted Answer

A)  Put 
B)  Naked 
C)  Covered 
D)  Out-of-the-money 
E)  In-the-money 
A)  Put 
B)  Naked 
C)  Covered 
D)  Out-of-the-money 
E)  In-the-money

Question 2

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Call options generally sell at a price less than their exercise value. 
B)  If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value. 
C)  Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be. 
D)  Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. 
E)  If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit. 
A)  Call options generally sell at a price less than their exercise value. 
B)  If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value. 
C)  Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be. 
D)  Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. 
E)  If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.

Question 4

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

Accepted Answer

A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises. 
A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises.

Question 5

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.

Accepted Answer

A) True 
 B)False

Question 6

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Accepted Answer

A)  The price of the call option will increase by more than $2. 
B)  The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C)  The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D)  The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E)  The price of the call option will increase by $2. 
A)  The price of the call option will increase by more than $2. 
B)  The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. 
C)  The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. 
D)  The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%. 
E)  The price of the call option will increase by $2.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B)  Options typically sell for less than their exercise value. 
C)  LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D)  An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E)  Put options give investors the right to buy a stock at a certain strike price before a specified date. 
A)  Call options give investors the right to sell a stock at a certain strike price before a specified date. 
B)  Options typically sell for less than their exercise value. 
C)  LEAPS are very short-term options that were created relatively recently and now trade in the market. 
D)  An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend. 
E)  Put options give investors the right to buy a stock at a certain strike price before a specified date.

Question 8

Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?

Accepted Answer

A)  -$5.10 
B)  $19.90 
C)  $20.90 
D)  $22.50 
E)  $27.60 
A)  -$5.10 
B)  $19.90 
C)  $20.90 
D)  $22.50 
E)  $27.60

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Which of the following statements is CORRECT?

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Which of the following statements is CORRECT?

An overview of financial management and the financial environment

Financial statements, cash flow, and taxes

Analysis of financial statements

Time value of money

Bonds, bond valuation, and interest rates

Risk and return

Valuation of stocks and corporations

The cost of capital

The basics of capital budgeting: evaluating cash flows

Cash flow estimation and risk analysis

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

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Exam 8: Financial options and applications in corporate finance

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Which of the following statements is CORRECT?

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options)on the firm's stock.

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?

Which of the following statements is CORRECT?

An overview of financial management and the financial environment

Financial statements, cash flow, and taxes

Analysis of financial statements

Time value of money

Bonds, bond valuation, and interest rates

Risk and return

Valuation of stocks and corporations

The cost of capital

The basics of capital budgeting: evaluating cash flows

Cash flow estimation and risk analysis

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

Filters