Question 1

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 2

According to put-call parity, which of the following would cause the value of a call option to decrease?

Accepted Answer

A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put price 
A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put price

Question 3

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 4

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 5

Use the figure for the question below.  
-This graph depicts the payoffs of a ________.

Accepted Answer

A)  short position in a put option at expiration 
B)  short position in a call option at expiration 
C)  long position in a put option at expiration 
D)  long position in a call option at expiration 
A)  short position in a put option at expiration 
B)  short position in a call option at expiration 
C)  long position in a put option at expiration 
D)  long position in a call option at expiration

Question 6

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

Accepted Answer

A) True 
 B)False

Question 7

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Rackspace.
RAX 30.09 +0.48
  
-How many of the December 2010 put options are in-the-money?

Accepted Answer

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

Question 8

What is a call option?

Accepted Answer

A call option gives the owner

Question 9

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 10

For every owner of a call option there is also an option writer, the person who takes the other side.

Accepted Answer

A) True 
 B)False

Question 11

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

Accepted Answer

A)  sell 
B)  buy 
C)  hold 
D)  none of the above 
A)  sell 
B)  buy 
C)  hold 
D)  none of the above

Question 12

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 13

What are American options?

Accepted Answer

American options, the most com

Question 14

When the exercise price of an option is equal to 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 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

________ is the relationship between the value of a stock, bond and the call and put options on the same stock and the same exercise price.

Accepted Answer

A)  Dividend exclusion 
B)  Limit law 
C)  Put-call parity 
D)  Put option equality 
A)  Dividend exclusion 
B)  Limit law 
C)  Put-call parity 
D)  Put option equality

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  The intrinsic value of an option is the value it would have if it expired immediately. 
B)  A European option cannot be worth less than an identical American option. 
C)  Put options increase in value as the stock price falls. 
D)  A put option cannot be worth more than its strike price. 
A)  The intrinsic value of an option is the value it would have if it expired immediately. 
B)  A European option cannot be worth less than an identical American option. 
C)  Put options increase in value as the stock price falls. 
D)  A put option cannot be worth more than its strike price.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

The higher the volat

Question 20

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

Exam 21: Option Applications and Corporate Finance

The holder of a put option has ________.

According to put-call parity, which of the following would cause the value of a call option to decrease?

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

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.

Use the figure for the question below. -This graph depicts the payoffs of a ________.

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

Use the table for the question(s) below. Consider the following information on options from the CBOE for Rackspace. RAX 30.09 +0.48 -How many of the December 2010 put options are in-the-money?

What is a call option?

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.

For every owner of a call option there is also an option writer, the person who takes the other side.

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

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.

What are American options?

When the exercise price of an option is equal to the current price of the stock, the option is said to be ________.

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

________ is the relationship between the value of a stock, bond and the call and put options on the same stock and the same exercise price.

Which of the following statements is FALSE?

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

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

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

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

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