Question 1

Which of the following will increase the value of a put option?

Accepted Answer

A)  a decrease in the time to maturity 
B)  an increase in the stock price 
C)  a decrease in the stock's volatility 
D)  a decrease in the exercise price 
E)  a decrease in the risk-free rate 
A)  a decrease in the time to maturity 
B)  an increase in the stock price 
C)  a decrease in the stock's volatility 
D)  a decrease in the exercise price 
E)  a decrease in the risk-free rate E

Question 2

A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?

Accepted Answer

A)  $-11 
B)  $11 
C)  $1.15 
D)  -$1.15 
E)  $0 
A)  $-11 
B)  $11 
C)  $1.15 
D)  -$1.15 
E)  $0 E

Question 3

A(n)________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.

Accepted Answer

A)  decrease, equity holders 
B)  increase, equity holders 
C)  decrease, directors 
D)  increase, directors 
E)  decrease, suppliers 
A)  decrease, equity holders 
B)  increase, equity holders 
C)  decrease, directors 
D)  increase, directors 
E)  decrease, suppliers B

Question 4

________ options allow the holder to exercise the option only on the expiration date.

Accepted Answer

A)  Canadian 
B)  American 
C)  European 
D)  Brazilian 
E)  Chinese 
A)  Canadian 
B)  American 
C)  European 
D)  Brazilian 
E)  Chinese

Question 5

According to put-call parity,which of the following would cause the value of a call option to decrease?

Accepted Answer

A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put 
E)  an increase in the price of the put 
A)  a decrease in the present value of future dividends 
B)  a decrease in the present value of the strike price 
C)  an increase in the stock price 
D)  a decrease in the price of the put 
E)  an increase in the price of the put

Question 6

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-Assume you want to buy 10 put option contracts with an exercise price closest to being at-the-money and that expires January 2011.The current price that you would have to pay for such a contract is:

Accepted Answer

A)  $1750 
B)  $2000 
C)  $1950 
D)  $2200 
E)  $2550 
A)  $1750 
B)  $2000 
C)  $1950 
D)  $2200 
E)  $2550

Question 7

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-How many of the January 2009 put options are out-of-the-money?

Accepted Answer

A)  0 
B)  1 
C)  2 
D)  3 
E)  4 
A)  0 
B)  1 
C)  2 
D)  3 
E)  4

Question 8

Use the figure for the question(s) below.
  
-What is the short position of an options contract?

Accepted Answer

The option seller or writer is

Question 9

How does option pricing theory help explain why equity holders have an incentive to take on negative-NPV,high-volatility investments?

Accepted Answer

Since equity is like a call option on th

Question 10

Suppose you purchase a call option for $5 and a strike price of $40.On the expiration day,the price of the stock is $55.What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  125% 
B)  200% 
C)  275% 
D)  300% 
E)  -100% 
A)  125% 
B)  200% 
C)  275% 
D)  300% 
E)  -100%

Question 11

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation,what does the term S represent?

Accepted Answer

A)  the payoff of a zero-coupon bond 
B)  the strike price of the option 
C)  the value of the call option 
D)  the stock's current price 
E)  the value of the put option 
A)  the payoff of a zero-coupon bond 
B)  the strike price of the option 
C)  the value of the call option 
D)  the stock's current price 
E)  the value of the put option

Question 12

When is an option in-the-money?

Accepted Answer

An option is in-the-

Question 13

When you purchase a put option while still holding the underlying stock,it is known as a

Accepted Answer

A)  protective put. 
B)  protective call. 
C)  speculative put. 
D)  speculative call. 
E)  downside put. 
A)  protective put. 
B)  protective call. 
C)  speculative put. 
D)  speculative call. 
E)  downside put.

Question 14

Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Luther with a strike price of $45.

Accepted Answer

C = P + S - PV(K)- P

Question 15

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

Accepted Answer

A)  sell 
B)  buy 
C)  hold 
D)  exchange 
E)  provide 
A)  sell 
B)  buy 
C)  hold 
D)  exchange 
E)  provide

Question 16

When is an option out-the-money?

Accepted Answer

An option is out-the

Question 17

The ________ side of an options contract has the option to exercise,while the ________ side has an obligation to fulfill the contract.

Accepted Answer

A)  long, long 
B)  short, long 
C)  long, short 
D)  short, short 
E)  short, other 
A)  long, long 
B)  short, long 
C)  long, short 
D)  short, short 
E)  short, other

Question 18

When the exercise price of a call option is higher than the current price of the stock,the option is said to be

Accepted Answer

A)  at-the-money. 
B)  in-the-money. 
C)  out-of-the-money. 
D)  trading at par. 
E)  trading below par. 
A)  at-the-money. 
B)  in-the-money. 
C)  out-of-the-money. 
D)  trading at par. 
E)  trading below par.

Question 19

Use the figure for the question(s) below.
  
-This graph depicts the payoffs of a

Accepted Answer

A)  short position in a put option at expiration. 
B)  short position in a call option at expiration. 
C)  long position in a put option at expiration. 
D)  long position in a call option at expiration. 
E)  long position in a call option before expiration. 
A)  short position in a put option at expiration. 
B)  short position in a call option at expiration. 
C)  long position in a put option at expiration. 
D)  long position in a call option at expiration. 
E)  long position in a call option before expiration.

Question 20

Luther Industries is currently trading for $27 per share.The stock pays no dividends.A one-year European put option on Luther with a strike price of $30 is currently trading for $2.60.If the risk-free interest rate is 6% per year,then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:

Accepted Answer

A)  $1.30 
B)  $7.10 
C)  $2.60 
D)  $1.95 
E)  $3.00 
A)  $1.30 
B)  $7.10 
C)  $2.60 
D)  $1.95 
E)  $3.00

Exam 13: Risk and the Pricing of Options

Which of the following will increase the value of a put option?

A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?

A(n)________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.

________ options allow the holder to exercise the option only on the expiration date.

According to put-call parity,which of the following would cause the value of a call option to decrease?

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -How many of the January 2009 put options are out-of-the-money?

Use the figure for the question(s) below. -What is the short position of an options contract?

How does option pricing theory help explain why equity holders have an incentive to take on negative-NPV,high-volatility investments?

Suppose you purchase a call option for $5 and a strike price of $40.On the expiration day,the price of the stock is $55.What is the return on the call option if you hold your position until maturity?

Consider the following equation: C = P + S - PV(K)- PV(Div) In this equation,what does the term S represent?

When is an option in-the-money?

When you purchase a put option while still holding the underlying stock,it is known as a

A call option gives the owner the right to ________ an asset at a fixed price at some future date.

When is an option out-the-money?

The ________ side of an options contract has the option to exercise,while the ________ side has an obligation to fulfill the contract.

When the exercise price of a call option is higher than the current price of the stock,the option is said to be

Use the figure for the question(s) below. -This graph depicts the payoffs of a

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

A(n) in the volatility of assets of the firm benefits at a cost to debt holders.

The side of an options contract has the option to exercise,while the side has an obligation to fulfill the contract.