Question 1

Calls on the King Co. closed trading at 2 5/8. You bought 3 call contracts at the close. The cost of 3 call options were:

Accepted Answer

A)  $2.6255 plus brokerage fees, etc. 
B)  $7.875 plus brokerage fees, etc. 
C)  $262.50 plus brokerage fees, etc. 
D)  $787.50 plus brokerage fees, etc. 
A)  $2.6255 plus brokerage fees, etc. 
B)  $7.875 plus brokerage fees, etc. 
C)  $262.50 plus brokerage fees, etc. 
D)  $787.50 plus brokerage fees, etc. D

Question 2

The Black-Scholes OPM is dependent on which five parameters?

Accepted Answer

A)  Stock price, exercise price, risk free rate, probability, and time to maturity. 
B)  Stock price, risk free rate, probability, time to maturity, and variance. 
C)  Stock price, risk free rate, probability, variance and exercise price. 
D)  Stock price, exercise price, risk free rate, variance and time to maturity. 
E)  Exercise price, probability, stock price, variance and time to maturity. 
A)  Stock price, exercise price, risk free rate, probability, and time to maturity. 
B)  Stock price, risk free rate, probability, time to maturity, and variance. 
C)  Stock price, risk free rate, probability, variance and exercise price. 
D)  Stock price, exercise price, risk free rate, variance and time to maturity. 
E)  Exercise price, probability, stock price, variance and time to maturity. D

Question 3

Tele-Tech Com has announced a large loss in their on-line services division causing the price of Tele-Tech Com stock to drop but the price volatility of the stock is not expected to drop. Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?

Accepted Answer

A)  Both changes cause the price of the put option to decrease. 
B)  Both changes cause the price of the put option to increase. 
C)  The volatility normally will have a positive effect on the price of the put option, but the lower price of the stock will cause the price of the put option to increase. 
D)  The volatility normally will have a negative effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease. 
E)  Volatility has no direct effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease. 
A)  Both changes cause the price of the put option to decrease. 
B)  Both changes cause the price of the put option to increase. 
C)  The volatility normally will have a positive effect on the price of the put option, but the lower price of the stock will cause the price of the put option to increase. 
D)  The volatility normally will have a negative effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease. 
E)  Volatility has no direct effect on the price of the put option while the lower price of the stock will cause the price of the put option to decrease. C

Question 4

In general, an option gives the holder the right to exercise at the ______ price through the ______ date.

Accepted Answer

A)  strike; inception. 
B)  American; inception. 
C)  European; expiration. 
D)  strike; expiration. 
A)  strike; inception. 
B)  American; inception. 
C)  European; expiration. 
D)  strike; expiration.

Question 5

Use the Black-Scholes model to determine the option price for a call option which will expire in one year. The strike price is $17.50, the stock pays no dividends and has a current market price of $20.00. The volatility of the stock has resulted in an annualized standard deviation of 10%. The interest rate on a T-bill that matures in one year is 7%.

Accepted Answer

d1 = [ln(20/17.5) + 0.07+(0.5*(0.1^2))*1

Question 6

Which one of the following statements correctly describes your situation as the owner of an American call option?

Accepted Answer

A)  You are obligated to buy at a set price at any time up to and including the expiration date. 
B)  You have the right to sell at a set price at any time up to and including the expiration date. 
C)  You have the right to buy at a set price only on the expiration date. 
D)  You are obligated to sell at a set price if the option is exercised. 
E)  You have the right to buy at a set price at any time up to and including the expiration date. 
A)  You are obligated to buy at a set price at any time up to and including the expiration date. 
B)  You have the right to sell at a set price at any time up to and including the expiration date. 
C)  You have the right to buy at a set price only on the expiration date. 
D)  You are obligated to sell at a set price if the option is exercised. 
E)  You have the right to buy at a set price at any time up to and including the expiration date.

Question 7

Explain how the value of a firm can be viewed as an option. How can the call and put views be resolved?

Accepted Answer

Call
- bondholders own firm
- bondholder

Question 8

A stock has both a call and a put option outstanding. The exercise price was set equal to the stock price. If the option were to expire now what would be the minimum value of the call and the put respectively?

Accepted Answer

A)  (ST - 
E) ; ³ 0. 
B)  0; (ST - 
E) . 
C)  0. 
D)  0; 0. 
E)  (E - ST); (ST - 
E) . 
A)  (ST - 
E) ; ³ 0. 
B)  0; (ST - 
E) . 
C)  0. 
D)  0; 0. 
E)  (E - ST); (ST - 
E) .

Question 9

Which of the following statements is true?

Accepted Answer

A)  American options are options on securities of U.S. corporations, and the options are traded on American exchanges. European options are options on securities of U.S. corporations, but the options are traded on European exchanges. 
B)  American options are options on securities which are traded on American exchanges. European options, also traded on American exchanges, are options on European corporations. 
C)  American options give the holder the right to the dividend payment. European options do not. 
D)  American options may be exercised anytime up to expiration. European options may be exercised only at expiration. 
A)  American options are options on securities of U.S. corporations, and the options are traded on American exchanges. European options are options on securities of U.S. corporations, but the options are traded on European exchanges. 
B)  American options are options on securities which are traded on American exchanges. European options, also traded on American exchanges, are options on European corporations. 
C)  American options give the holder the right to the dividend payment. European options do not. 
D)  American options may be exercised anytime up to expiration. European options may be exercised only at expiration.

Question 10

You own a call option with time to expiration. The common stock is selling for $15 and your exercise price is $12, this option:

Accepted Answer

A)  must be sold to the writer. 
B)  is in-the-money. 
C)  is out-of-the-money. 
D)  must be offset by a put. 
A)  must be sold to the writer. 
B)  is in-the-money. 
C)  is out-of-the-money. 
D)  must be offset by a put.

Question 11

The Federal Reserve Board decreases open-market purchases, which results in a general increase in interest rates. As a result, the price of Specific Car stock drops. Which of the following correctly describes the impact of these changes on the price of the call option for Specific Car stock?

Accepted Answer

A)  Both changes cause the price of the call option to decrease. 
B)  Both changes cause the price of the call option to increase. 
C)  The higher interest rate will cause the price of the call option to decrease. The lower price of the stock will cause the price of the call option to increase. 
D)  The higher interest rate will cause the price of the call option to increase. The lower price of the stock will cause the price of the call option to decrease. 
E)  The higher interest rate has no direct effect on the price of the call option. The lower price of the stock will cause the price of the call option to decrease. 
A)  Both changes cause the price of the call option to decrease. 
B)  Both changes cause the price of the call option to increase. 
C)  The higher interest rate will cause the price of the call option to decrease. The lower price of the stock will cause the price of the call option to increase. 
D)  The higher interest rate will cause the price of the call option to increase. The lower price of the stock will cause the price of the call option to decrease. 
E)  The higher interest rate has no direct effect on the price of the call option. The lower price of the stock will cause the price of the call option to decrease.

Question 12

You own five put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

Accepted Answer

A)  -$250 
B)  -$50 
C)  $0 
D)  $50 
E)  $250 
A)  -$250 
B)  -$50 
C)  $0 
D)  $50 
E)  $250

Question 13

Pay-off diagrams for a call options versus stock prices are called:

Accepted Answer

A)  vertical tower diagrams. 
B)  hockey stick diagrams. 
C)  fulcrum diagrams. 
D)  cumulative frequency diagrams. 
A)  vertical tower diagrams. 
B)  hockey stick diagrams. 
C)  fulcrum diagrams. 
D)  cumulative frequency diagrams.

Question 14

Use the Black-Scholes model to determine the option price for the May 35 call for Nibblers as of April 18, 2015. The expiration date for this option is May 18, 2015. The annualized interest rate on a T-bill that matures that same day is 3.0%. Nibblers stock closed at 36. The historic variance for Nibblers is .25. Assume a 365 day year.

Accepted Answer

d₁ = {ln(36/35) + [.03 + (.5)(.

Question 15

Tele-Tech Com announces a major expansion into internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on the call option of Tele-Tech Com?

Accepted Answer

A)  Both changes cause the price of the call option to decrease. 
B)  Both changes cause the price of the call option to increase. 
C)  The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase. 
D)  The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease. 
E)  The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease. 
A)  Both changes cause the price of the call option to decrease. 
B)  Both changes cause the price of the call option to increase. 
C)  The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase. 
D)  The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease. 
E)  The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease.

Question 16

Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due. In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cashflow of the firm is less than $10 million?

Accepted Answer

A)  The option is in-the-money and the stockholders earn the difference between the cash flow and the bondholder's promised payment. 
B)  The option is in-the-money and the bondholders earn the entire cash flow. 
C)  The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow. 
D)  The option is out-of-the-money, and the stockholders make up the difference so that the bondholders receive full payment. 
A)  The option is in-the-money and the stockholders earn the difference between the cash flow and the bondholder's promised payment. 
B)  The option is in-the-money and the bondholders earn the entire cash flow. 
C)  The option is out-of-the-money, the stockholders walk away, and the bondholders receive the entire cash flow. 
D)  The option is out-of-the-money, and the stockholders make up the difference so that the bondholders receive full payment.

Question 17

Which of the following statements is true?

Accepted Answer

A)  For both calls and puts an increase in the exercise price will cause an increase in the option price. 
B)  For both calls and puts an increase in the time to expiration will cause an increase in the option price. 
C)  For calls, but not for puts, an increase in the time to expiration will cause an increase in the option price. 
D)  For puts, but not for calls, an increase in the time to expiration will cause an increase in the option price. 
A)  For both calls and puts an increase in the exercise price will cause an increase in the option price. 
B)  For both calls and puts an increase in the time to expiration will cause an increase in the option price. 
C)  For calls, but not for puts, an increase in the time to expiration will cause an increase in the option price. 
D)  For puts, but not for calls, an increase in the time to expiration will cause an increase in the option price.

Question 18

Suppose your wealthy Aunt Minnie has asked you to manage her large stock portfolio. You would like to buy and/or sell options on many of the stocks she owns. Describe the types of options you would buy or sell, as well as your rationale, given the following circumstances:
a. Aunt Minnie owns 10,000 shares of IBM common stock. You believe it is going to fall in price, but she won't let you sell it because her late husband told her never to let it go. How do you protect her from the impending price decline?
b. Your analysis suggests that the common stock of Jet-Electro is poised to increase in value sharply over the next year. Aunt Minnie doesn't want to buy any of the stock, but does want you to use options to profit if the price rises. What do you do?
c. Although Aunt Minnie doesn't want you to sell any of the stocks she owns, she would like you to use options to generate a little extra income.
How might you do this?

Accepted Answer

Looking at each option, we see:
a. To pr

Question 19

A stock is selling for $31. There is a call option on the stock with an exercise price of $27. What is the approximate minimum value of the call option?

Accepted Answer

A)  $0 
B)  $4 
C)  $27 
D)  $31 
A)  $0 
B)  $4 
C)  $27 
D)  $31

Question 20

In relating stockholder value in terms of put options, the stockholders own the firm, they owe promised payments to the bondholders, and they have bought a put on the firm's assets with an exercise price equal to the promised payment to the bondholders. If the firm's cash flow is less than these promised payments:

Accepted Answer

A)  the put is out-of-the-money, is not exercised, and the stockholders retain ownership. 
B)  the put is out-of-the-money, is exercised, and the stockholders retain ownership. 
C)  the put is in-the-money, is exercised, and the stockholders walk away from their promise to the bondholders. 
D)  the put is in-the-money, is exercised, and the stockholders retain ownership. 
A)  the put is out-of-the-money, is not exercised, and the stockholders retain ownership. 
B)  the put is out-of-the-money, is exercised, and the stockholders retain ownership. 
C)  the put is in-the-money, is exercised, and the stockholders walk away from their promise to the bondholders. 
D)  the put is in-the-money, is exercised, and the stockholders retain ownership.

Exam 23: Options and Corporate Finance: Basic Concepts

Calls on the King Co. closed trading at 2 5/8. You bought 3 call contracts at the close. The cost of 3 call options were:

The Black-Scholes OPM is dependent on which five parameters?

Tele-Tech Com has announced a large loss in their on-line services division causing the price of Tele-Tech Com stock to drop but the price volatility of the stock is not expected to drop. Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?

In general, an option gives the holder the right to exercise at the ______ price through the ______ date.

Which one of the following statements correctly describes your situation as the owner of an American call option?

Explain how the value of a firm can be viewed as an option. How can the call and put views be resolved?

A stock has both a call and a put option outstanding. The exercise price was set equal to the stock price. If the option were to expire now what would be the minimum value of the call and the put respectively?

Which of the following statements is true?

You own a call option with time to expiration. The common stock is selling for $15 and your exercise price is $12, this option:

The Federal Reserve Board decreases open-market purchases, which results in a general increase in interest rates. As a result, the price of Specific Car stock drops. Which of the following correctly describes the impact of these changes on the price of the call option for Specific Car stock?

You own five put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

Pay-off diagrams for a call options versus stock prices are called:

Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due. In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cashflow of the firm is less than $10 million?

Which of the following statements is true?

A stock is selling for $31. There is a call option on the stock with an exercise price of $27. What is the approximate minimum value of the call option?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

In general, an option gives the holder the right to exercise at the price through the date.