Exam 23: Options and Corporate Finance: Basic Concepts

Suppose a situation exists where you can purchase a share of stock for $25, purchase a put option on the stock for $3, and write a call option against the stock for $4. Also suppose that holding these three positions guarantees a payoff of $30 one year from today. If the risk free rate is 20%, does put-call parity hold? If not, then what new price of the put option would allow put-call parity to hold?

The payoff diagram for a put with the same exercise price and premium as the call on the same underlying asset with the same maturity is:

When a firm in financial distress accepts very risky projects, the stockholders benefit at the expense of the bondholders. In terms of option theory, the gain to the stockholders occurs because:

An insight gained by bringing the theory of options into standard capital budgeting analysis is:

In terms of relating options to firm value, if the stockholders have a call option on the firm, what do the bondholders have?

Which of the following statements is true?

You have entered into a call option contract for 1 period. The stock is selling for $28, you borrowed $12 at 8% and the delta is 0.6. What is the value of the call?

In terms of relating options to the value of the firm, the equity of the firm can be viewed as:

To compute the value of a put using the Black-Scholes option pricing model, you:

The special contractual nature giving the owner the right to buy or sell an asset at a fixed price on or before a given date is the basis of:

When reading option price quotes from the Wall Street Journal or National Post, a price of "-" indicates that:

What is the intrinsic value of the August 25 call? KNJ (KNJ) Underlying stock price: 30.86

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 cash flow of the firm is greater than $10 million?

You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of ______

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

A put gives the owner the right:

You hold a put option on a stock with a strike price of $23. The stock is selling for $25. What is the approximate minimum value of the put option?

A trading opportunity that offers a riskless profit is called a(n):

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

If the time to expiration of the underlying stock decreases, then the: