Question 1

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

Accepted Answer

A)   Variability of the stock price.
B)   Option's time to maturity.
C)   Strike price.
D)   All of the above.
E)   None of the above.F) A) and B)
G) B) and C)

Question 2

If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price),then we would expect the premium to increase as the stock price increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

Accepted Answer

A) True 
 B)False

Question 4

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 5

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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.F) A) and D)
G) A) and C)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
B)   Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
C)   Call options generally sell at a price below their exercise value, and the lower the exercise value, 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 does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.F) A) and C)
G) B) and E)

Question 10

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

Accepted Answer

A) True 
 B)False

Question 11

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Accepted Answer

A) True 
 B)False  True

Question 13

An option that gives the holder the right to sell a stock at a specified price at some future time is

Accepted Answer

A)   a put option.
B)   an out-of-the-money option.
C)   a naked option.
D)   a covered option.
E)   a call option.F) None of the above
G) A) and C)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B)   Issuing options provides companies with a low cost method of raising capital.
C)   The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D)   The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E)   An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.F) B) and C)
G) A) and E)

Question 15

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,provided the strike prices for the put and call are the same.

Accepted Answer

A) True 
 B)False

Question 16

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-moneyF) D) and E)
G) A) and E)

Question 17

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False  False

Question 18

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)   $27.60F) B) and E)
G) A) and B) B

Question 19

Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?

Accepted Answer

A)   -$3.10
B)   $16.90
C)   $17.75
D)   $22.50
E)   $25.60F) A) and B)
G) B) and E)

Question 20

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?

Accepted Answer

A)   The exercise price of the option is increased.
B)   The life of the option is increased, i.e., the time until it expires is lengthened.
C)   The Federal Reserve takes actions that increase the risk-free rate.
D)   BLW's stock price becomes more risky (higher variance) .
E)   BLW's stock price suddenly increases.F) D) and E)
G) C) and D)

Exam 8: Financial Options and Applications in Corporate Finance

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

Correct Answer
verified

Correct Answer
verified

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

Correct Answer
verified

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Correct Answer
verified

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Correct Answer
verified

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.

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

Correct Answer
verified

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Correct Answer
verified

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct Answer
verified
True

An option that gives the holder the right to sell a stock at a specified price at some future time is

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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,provided the strike prices for the put and call are the same.

Correct Answer
verified

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

Correct Answer
verified

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Correct Answer
verified
False

Correct Answer
verified
B

Correct Answer
verified

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?

Correct Answer
verified

Exam 8: Financial Options and Applications in Corporate Finance

Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.

Correct AnswerverifiedShow Answer

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Correct AnswerverifiedShow Answer

If the market is in equilibrium,then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

Correct AnswerverifiedShow Answer

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Correct AnswerverifiedShow Answer

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

Correct AnswerverifiedTrue

An option that gives the holder the right to sell a stock at a specified price at some future time is

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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,provided the strike prices for the put and call are the same.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.

Correct AnswerverifiedFalse

Correct AnswerverifiedB

Correct AnswerverifiedShow Answer

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options,other things held constant?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
False

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified