Question 1

If the stock makes a dividend payment before the expiration date, then the put-call parity relation is

Accepted Answer

A) Value of call = value of put + share price − present value (PV)of dividend − PV of exercise price. 
B) Value of call = value of put − share price + PV of dividend − PV of exercise price. 
C) Value of call = value of put + share price + PV of dividend + PV of exercise price. 
D) Value of call = value of put + share price + PV of dividend − PV of exercise price. 
A) Value of call = value of put + share price − present value (PV)of dividend − PV of exercise price. 
B) Value of call = value of put − share price + PV of dividend − PV of exercise price. 
C) Value of call = value of put + share price + PV of dividend + PV of exercise price. 
D) Value of call = value of put + share price + PV of dividend − PV of exercise price.

Question 2

Figure 4 depicts the

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

The value of a put option is negatively related to the:
I.stock price;
II.volatility of the underlying stock price;
III.exercise price

Accepted Answer

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

Question 5

A put option gives the owner the right

Accepted Answer

A) and the obligation to buy an asset at a given price. 
B) and the obligation to sell an asset at a given price. 
C) but not the obligation to buy an asset at a given price. 
D) but not the obligation to sell an asset at a given price. 
A) and the obligation to buy an asset at a given price. 
B) and the obligation to sell an asset at a given price. 
C) but not the obligation to buy an asset at a given price. 
D) but not the obligation to sell an asset at a given price.

Question 6

The value of a call option is negatively related to the:
I.exercise price;
II.risk-free rate;
III.time to expiration

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 7

A call option has an exercise price of $150. At the option expiration date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?

Accepted Answer

A) Lend PV of $100 and buy two calls. 
B) Lend PV of $100 and sell two calls. 
C) Borrow $100 and buy two calls. 
D) Borrow $100 and sell two calls. 
A) Lend PV of $100 and buy two calls. 
B) Lend PV of $100 and sell two calls. 
C) Borrow $100 and buy two calls. 
D) Borrow $100 and sell two calls.

Question 8

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs.)

Accepted Answer

A) The value of two shares of stock. 
B) The value of one share of stock plus the exercise price. 
C) The exercise price. 
D) The value of one share of stock minus the exercise price. 
A) The value of two shares of stock. 
B) The value of one share of stock plus the exercise price. 
C) The exercise price. 
D) The value of one share of stock minus the exercise price.

Question 9

Define the term put option.

Accepted Answer

A put option is defined as a r

Question 10

A profit diagram implicitly neglects the time value of money.

Accepted Answer

A) True 
 B)False

Question 11

From a geometric viewpoint, how is the position diagram for a put option related to the diagram of a call option on the same stock having the same exercise price and maturity?

Accepted Answer

A) The inverse of the call diagram 
B) Unrelated to the call diagram no matter what the exercise price 
C) The mirror image of the call diagram, reflected around the exercise price 
D) Exactly the same as the call diagram for the given exercise price 
A) The inverse of the call diagram 
B) Unrelated to the call diagram no matter what the exercise price 
C) The mirror image of the call diagram, reflected around the exercise price 
D) Exactly the same as the call diagram for the given exercise price

Question 12

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

Accepted Answer

A) True 
 B)False

Question 13

All else equal, the closer an option gets to expiration, the lower the option price.

Accepted Answer

A) True 
 B)False

Question 14

Explain the main differences between position diagrams and profit diagrams.

Accepted Answer

Position diagrams show payoffs at option

Question 15

A European option gives its owner the right to exercise the option at any time before expiration.

Accepted Answer

A) True 
 B)False

Question 16

The value of a call option increases as the volatility of the underlying stock price increases.

Accepted Answer

A) True 
 B)False

Question 17

All else equal, as the underlying stock price increases:

Accepted Answer

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

Question 18

The value of a put option at expiration equals the

Accepted Answer

A) market price of the share minus the exercise price. 
B) higher of the exercise price minus market price of the share and zero. 
C) exercise price. 
D) share price. 
A) market price of the share minus the exercise price. 
B) higher of the exercise price minus market price of the share and zero. 
C) exercise price. 
D) share price.

Question 19

The value of any option (both call and put options)is positively related to the
I.volatility of the underlying stock price;
II.time to expiration;
III.risk-free rate;

Accepted Answer

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

Question 20

Briefly explain how an option holder gains from an increase in the volatility of the underlying stock price.

Accepted Answer

An option holder gains from the volatili

Exam 20: Understanding Options

If the stock makes a dividend payment before the expiration date, then the put-call parity relation is

Figure 4 depicts the

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

The value of a put option is negatively related to the: I.stock price; II.volatility of the underlying stock price; III.exercise price

A put option gives the owner the right

The value of a call option is negatively related to the: I.exercise price; II.risk-free rate; III.time to expiration

A call option has an exercise price of $150. At the option expiration date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs.)

Define the term put option.

A profit diagram implicitly neglects the time value of money.

From a geometric viewpoint, how is the position diagram for a put option related to the diagram of a call option on the same stock having the same exercise price and maturity?

It is possible to replicate an investment in a call option by a levered investment in the underlying asset.

All else equal, the closer an option gets to expiration, the lower the option price.

Explain the main differences between position diagrams and profit diagrams.

A European option gives its owner the right to exercise the option at any time before expiration.

The value of a call option increases as the volatility of the underlying stock price increases.

All else equal, as the underlying stock price increases:

The value of a put option at expiration equals the

The value of any option (both call and put options)is positively related to the I.volatility of the underlying stock price; II.time to expiration; III.risk-free rate;

Briefly explain how an option holder gains from an increase in the volatility of the underlying stock price.

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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