Question 1

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 C

Question 2

Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the stock is $30. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  25% 
B)  50% 
C)  75% 
D)  100% 
A)  25% 
B)  50% 
C)  75% 
D)  100% D

Question 3

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 B

Question 4

What are European options?

Accepted Answer

European options, allow their

Question 5

When is an option at-the-money?

Accepted Answer

An option is at-the-money when

Question 6

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 7

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 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

Using options to place a bet on the direction in which you believe the market is likely to move is called ________.

Accepted Answer

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

Question 10

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 11

Suppose that a stock sells at a price of $10 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)  $0 
A)  $20 
B)  $30 
C)  $40 
D)  $0

Question 12

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 13

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 14

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 15

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 16

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 17

The price at which the holder of an option buys or sells a share of stock when the option is exercised is called the ________ price.

Accepted Answer

A)  strike 
B)  American 
C)  dilutive 
D)  none of the above 
A)  strike 
B)  American 
C)  dilutive 
D)  none of the above

Question 18

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 19

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 20

You have shorted a call option on WSJ stock with a strike price of $50. The option will expire in exactly six months. If the stock is trading at $45 in three month, what will you owe for each share in the contract?

Accepted Answer

A)  $0 
B)  $50 
C)  $60 
D)  $10 
A)  $0 
B)  $50 
C)  $60 
D)  $10

Exam 21: Option Applications and Corporate Finance

Using options to reduce risk is called ________.

Suppose you purchase a call option for $5 and a strike price of $20. On the expiration day, the price of the stock is $30. What is the return on the call option if you hold your position until maturity?

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

What are European options?

When is an option at-the-money?

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 ________.

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

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

Using options to place a bet on the direction in which you believe the market is likely to move is called ________.

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

Suppose that a stock sells at a price of $10 on the expiration date. Compute the price of a call option if the option strike price is $20.

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

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

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?

The writer of a call option has ________.

The price at which the holder of an option buys or sells a share of stock when the option is exercised is called the ________ price.

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

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

You have shorted a call option on WSJ stock with a strike price of $50. The option will expire in exactly six months. If the stock is trading at $45 in three month, what will you owe for each share in the contract?

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 .

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

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