Question 1

Briefly explain the relationship between risk and option values.

Accepted Answer

Options on volatile (risky)assets are mo

Question 2

In June 2020, an investor buys call options on Amgen stock with an exercise of price of $65 and expiring in January 2022. If the stock price in June 2021 is $60, then these options are
I.in-the-money;
II.out-of-the-money;
III.a LEAPS option

Accepted Answer

A) I only 
B) II only 
C) III only 
D) II and III only 
A) I only 
B) II only 
C) III only 
D) II and III only

Question 3

The difference between the value of a call option and the stock price less the exercise price is greatest when the option is:

Accepted Answer

A) out of the money. 
B) in the money. 
C) at the money. 
D) cannot be determined. 
A) out of the money. 
B) in the money. 
C) at the money. 
D) cannot be determined.

Question 4

Buying a stock and a put option, and lending the present value of the exercise price provide the same payoff as buying a call option.

Accepted Answer

A) True 
 B)False

Question 5

All else equal, as the underlying stock price increases:

Accepted Answer

A) the call price decreases. 
B) the call price increases. 
C) there is no effect on call price. 
D) the call price can either increase, decrease, or remain the same. 
A) the call price decreases. 
B) the call price increases. 
C) there is no effect on call price. 
D) the call price can either increase, decrease, or remain the same.

Question 6

Buying an in-the-money option will almost always produce a profit.

Accepted Answer

A) True 
 B)False

Question 7

The following are examples of "disguised options":
I.acquiring growth opportunities;
II.ability of the firm to terminate a project when it is no longer profitable;
III.covenants within corporate securities that provide flexibility to change the terms of the securities

Accepted Answer

A) I only 
B) II only 
C) I and III only 
D) I, II, and III 
A) I only 
B) II only 
C) I and III only 
D) I, II, and III

Question 8

Why would an option holder almost never exercise an option early?

Accepted Answer

Before expiration, the option value is a

Question 9

Define the term call option.

Accepted Answer

A call option is defined as a

Question 10

For European options, the value of a put is equal to

Accepted Answer

A) the value of a call minus the value of a share plus the present value of the exercise price. 
B) the value of a call plus the value of a share plus the present value of the exercise price. 
C) the value of the share minus the value of a call plus the present value of the exercise price. 
D) the value of the share minus the present value of the exercise price plus the value of a call. 
A) the value of a call minus the value of a share plus the present value of the exercise price. 
B) the value of a call plus the value of a share plus the present value of the exercise price. 
C) the value of the share minus the value of a call plus the present value of the exercise price. 
D) the value of the share minus the present value of the exercise price plus the value of a call.

Question 11

An American call option gives its owner the right to buy stock at a fixed strike price during a specified period of time.

Accepted Answer

A) True 
 B)False

Question 12

The owner of a regular exchange-listed put-option on a stock

Accepted Answer

A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price. 
A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Question 13

Figure 2 depicts the

Accepted Answer

A) position diagram for the buyer of a call option. 
B) profit diagram for the buyer of a call option. 
C) position diagram for the buyer of a put option. 
D) profit diagram for the buyer of a put option. 
A) position diagram for the buyer of a call option. 
B) profit diagram for the buyer of a call option. 
C) position diagram for the buyer of a put option. 
D) profit diagram for the buyer of a put option.

Question 14

Which of the following investors would be happy to see the stock price rise sharply?
I.An investor who owns the stock and a put option;
II.An investor who has sold a put option and bought a call option;
III.correct for projects that have average risk compared to the firm's other assets. An investor who owns the stock and has sold a call option
IV.An investor who has sold a call option

Accepted Answer

A) I and II only 
B) III and IV only 
C) III only 
D) IV only 
A) I and II only 
B) III and IV only 
C) III only 
D) IV only

Question 15

Relative to the underlying stock, a call option always has

Accepted Answer

A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return. 
A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return.

Question 16

Figure 1 depicts the

Accepted Answer

A) position diagram for the buyer of a call option. 
B) profit diagram for the buyer of a call option. 
C) position diagram for the buyer of a put option. 
D) profit diagram for the buyer of a put option. 
A) position diagram for the buyer of a call option. 
B) profit diagram for the buyer of a call option. 
C) position diagram for the buyer of a put option. 
D) profit diagram for the buyer of a put option.

Question 17

Suppose an investor sells (writes)a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

Accepted Answer

A) The seller will need to deliver stock to the owner of the option. 
B) The seller will be obliged to buy stock from the owner of the option. 
C) The owner will not exercise the option. 
D) The option will extend for nine more months. 
A) The seller will need to deliver stock to the owner of the option. 
B) The seller will be obliged to buy stock from the owner of the option. 
C) The owner will not exercise the option. 
D) The option will extend for nine more months.

Question 18

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

Accepted Answer

A) Above the exercise price if the stock price rises and below the exercise price if it falls 
B) Equal to the exercise price regardless of the stock price 
C) Equal to zero regardless of the stock price 
D) Below the exercise price if the stock price rises and above if it falls 
A) Above the exercise price if the stock price rises and below the exercise price if it falls 
B) Equal to the exercise price regardless of the stock price 
C) Equal to zero regardless of the stock price 
D) Below the exercise price if the stock price rises and above if it falls

Question 19

Firms regularly use the following to reduce risk:
I.currency options
II.interest-rate options
III.commodity options

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I, II, and III 
A) I only 
B) II only 
C) III only 
D) I, II, and III

Question 20

Buying a call option, investing the present value of the exercise price in T-bills, and short-selling the underlying share is the same as

Accepted Answer

A) buying a call and a put. 
B) buying a put and a share. 
C) buying a put. 
D) selling a call. 
A) buying a call and a put. 
B) buying a put and a share. 
C) buying a put. 
D) selling a call.

Exam 20: Understanding Options

Briefly explain the relationship between risk and option values.

In June 2020, an investor buys call options on Amgen stock with an exercise of price of $65 and expiring in January 2022. If the stock price in June 2021 is $60, then these options are I.in-the-money; II.out-of-the-money; III.a LEAPS option

The difference between the value of a call option and the stock price less the exercise price is greatest when the option is:

Buying a stock and a put option, and lending the present value of the exercise price provide the same payoff as buying a call option.

All else equal, as the underlying stock price increases:

Buying an in-the-money option will almost always produce a profit.

The following are examples of "disguised options": I.acquiring growth opportunities; II.ability of the firm to terminate a project when it is no longer profitable; III.covenants within corporate securities that provide flexibility to change the terms of the securities

Why would an option holder almost never exercise an option early?

Define the term call option.

For European options, the value of a put is equal to

An American call option gives its owner the right to buy stock at a fixed strike price during a specified period of time.

The owner of a regular exchange-listed put-option on a stock

Figure 2 depicts the

Relative to the underlying stock, a call option always has

Figure 1 depicts the

Suppose an investor sells (writes)a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?

Firms regularly use the following to reduce risk: I.currency options II.interest-rate options III.commodity options

Buying a call option, investing the present value of the exercise price in T-bills, and short-selling the underlying share is the same as

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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