Question 1

The value of a call option ________ with the risk-free rate, and the value of a put option ________ with the risk-free rate.

Accepted Answer

A)  increases, increases 
B)  decreases, decreases 
C)  increases, decreases 
D)  decreases, increases 
A)  increases, increases 
B)  decreases, decreases 
C)  increases, decreases 
D)  decreases, increases

Question 2

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 3

Suppose that a stock sells at a price of $40 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 4

Suppose you are looking to exploit opportunities in the options markets. The price of a call option on Apple computers with a maturity of one year and strike price $150 is $15, and the price of the stock is $140. What should the price of a put option be to preclude profitable opportunities? The risk-free rate of interest is 5%.

Accepted Answer

A)  $21.45 
B)  $17.86 
C)  $25.00 
D)  $19.63 
A)  $21.45 
B)  $17.86 
C)  $25.00 
D)  $19.63

Question 5

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

Accepted Answer

A)  decrease, debt holders 
B)  decrease, suppliers 
C)  increase, directors 
D)  increase, debt holders 
A)  decrease, debt holders 
B)  decrease, suppliers 
C)  increase, directors 
D)  increase, debt holders

Question 6

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

Although the payouts on a long position in an options contract are never negative, the profit from purchasing and holding it could be negative.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

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 11

Options are also called derivative assets because they derive their value solely from the price of another asset.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is FALSE?

Accepted Answer

A)  Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond. 
B)  For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money. 
C)  The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D)  Because a put is the right to sell the stock, puts with a lower strike price are less valuable. 
A)  Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond. 
B)  For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money. 
C)  The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher. 
D)  Because a put is the right to sell the stock, puts with a lower strike price are less valuable.

Question 13

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 14

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 15

What is the short position of an options contract?

Accepted Answer

The option seller or writer is

Question 16

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  125% 
B)  130% 
C)  150% 
D)  170% 
A)  125% 
B)  130% 
C)  150% 
D)  170%

Question 17

For a(n) ________ put option, the longer the time to expiration, the greater the value of the option, all other things held constant.

Accepted Answer

A)  American 
B)  European 
C)  Asian 
D)  A & B 
A)  American 
B)  European 
C)  Asian 
D)  A & B

Question 18

Which of the following statements is FALSE?

Accepted Answer

A)  Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value. 
B)  An American option with a later exercise date is of more worth than an otherwise identical American option with an earlier exercise date. 
C)  The value of an option generally decreases with the volatility of the stock. 
D)  The investor holding a short position in an option has an obligation; he or she takes the opposite side of the contract to the investor who holds the long position. 
A)  Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value. 
B)  An American option with a later exercise date is of more worth than an otherwise identical American option with an earlier exercise date. 
C)  The value of an option generally decreases with the volatility of the stock. 
D)  The investor holding a short position in an option has an obligation; he or she takes the opposite side of the contract to the investor who holds the long position.

Question 19

________ options allow the holder to exercise the option on any date up to and including the expiration date.

Accepted Answer

A)  Canadian 
B)  American 
C)  European 
D)  None of the above 
A)  Canadian 
B)  American 
C)  European 
D)  None of the above

Question 20

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%

Exam 21: Option Applications and Corporate Finance

The value of a call option ________ with the risk-free rate, and the value of a put option ________ with the risk-free rate.

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 $40 on the expiration date. Compute the price of a call option if the option strike price is $20.

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

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

Although the payouts on a long position in an options contract are never negative, the profit from purchasing and holding it could be negative.

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

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

Options are also called derivative assets because they derive their value solely from the price of another asset.

Which of the following statements is FALSE?

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.

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

What is the short position of an options contract?

Suppose you purchase a call option for $4 and a strike price of $30. On the expiration day, the price of the stock is $40. What is the return on the call option if you hold your position until maturity?

For a(n) ________ put option, the longer the time to expiration, the greater the value of the option, all other things held constant.

Which of the following statements is FALSE?

________ options allow the holder to exercise the option on any date up to and including the expiration date.

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?

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 a call option with the risk-free rate, and the value of a put option with the risk-free rate.

Equity holders have an incentive to the volatility of a firm's assets because they benefit from such an increase at a cost to .

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