Exam 20: Understanding Options

The owner of a regular exchange-listed call-option on the stock:

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

A put option gives the owner the right:

Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

The value of a put option at expiration is:

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

Figure-4 depicts the:

If a put and call cost the same, how can an investor offset the cost of a buying a call?

If the volatility of the underlying asset decreases, then the:

If the underlying stock pays a dividend before the expiration of the options that will have the following effect on the price of the options: I. increase the value of the call option II) increase the value of the put option III. decrease the value of the call option IV. decrease the value of the put option

If you write a put option, you acquire the right to buy stock at a fixed strike price.

The following are examples of disguised options for firms: I. acquiring growth opportunities II. ability of the firm to terminate a project when it is no longer profitable III. options that are associated with corporate securities that provide flexibility to change the terms of the issues

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

Relative to the underlying stock, a call option always has:

Firms regularly use the following to reduce risk: I. Currency options II. Interest-rate options III. Commodity options

An increase in the exercise price results in an equal increase in the call option price.