Question 1

A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.

Accepted Answer

A) True 
 B)False

Question 2

What is the long position of an options contract?

Accepted Answer

The option buyer or

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move. 
B)  Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C)  Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price. 
D)  European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date. 
A)  Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move. 
B)  Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out-of-the-money. 
C)  Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price. 
D)  European options allow their holders to exercise the option only on the expiration date-holders cannot exercise before the expiration date.

Question 4

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 5

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 6

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 $20.

Accepted Answer

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

Question 7

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 8

The payoff to the holder of a call option is ________.

Accepted Answer

A)  strike price minus stock price if stock price is more than strike price 
B)  strike price minus stock price if stock price is less than strike price 
C)  stock price minus strike price if stock price is less than strike price 
D)  stock price minus strike price if stock price is more than strike price 
A)  strike price minus stock price if stock price is more than strike price 
B)  strike price minus stock price if stock price is less than strike price 
C)  stock price minus strike price if stock price is less than strike price 
D)  stock price minus strike price if stock price is more than strike price

Question 9

Which of the following statements is FALSE?

Accepted Answer

A)  The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B)  A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C)  In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy. 
D)  Because the price of equity is increasing with the volatility of the firm's assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets. 
A)  The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options. 
B)  A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding. 
C)  In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy. 
D)  Because the price of equity is increasing with the volatility of the firm's assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets.

Question 10

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 11

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:  
-How many of the January 2009 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 12

The payoff to the holder of a put option is ________.

Accepted Answer

A)  strike price minus stock price if stock price is more than strike price 
B)  strike price minus stock price if stock price is less than strike price 
C)  stock price minus strike price if stock price is less than strike price 
D)  stock price minus strike price if stock price is more than strike price 
A)  strike price minus stock price if stock price is more than strike price 
B)  strike price minus stock price if stock price is less than strike price 
C)  stock price minus strike price if stock price is less than strike price 
D)  stock price minus strike price if stock price is more than strike price

Question 13

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 14

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 $60.

Accepted Answer

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

Question 15

The value of an option ________ with the volatility of the underlying stock.

Accepted Answer

A)  increases 
B)  decreases 
C)  unchanged 
D)  cannot say for sure 
A)  increases 
B)  decreases 
C)  unchanged 
D)  cannot say for sure

Question 16

What is a put option?

Accepted Answer

A put option gives the owner t

Question 17

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 18

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 19

When is an option out-the-money?

Accepted Answer

An option is out-the

Question 20

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

Accepted Answer

A)  the payoff of a zero-coupon bond 
B)  the strike price of the option 
C)  the value of the call option 
D)  the stock's current price 
A)  the payoff of a zero-coupon bond 
B)  the strike price of the option 
C)  the value of the call option 
D)  the stock's current price

Exam 21: Option Applications and Corporate Finance

A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.

What is the long position of an options contract?

Which of the following statements is FALSE?

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.

Which of the following statements is FALSE?

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 $20.

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 payoff to the holder of a call option is ________.

Which of the following statements is FALSE?

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 Merck: -How many of the January 2009 put options are in-the-money?

The payoff to the holder of a put option is ________.

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 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 $60.

The value of an option ________ with the volatility of the underlying stock.

What is a put option?

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 ________.

When is an option out-the-money?

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

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 .