Question 1

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

Accepted Answer

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

Question 2

What effect does volatility of the underlying asset have on the price of the option?

Accepted Answer

The higher the volat

Question 3

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 in-the-money?

Accepted Answer

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

Question 4

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-The open interest for a January 2011 call option that is closest to being at-the-money is:

Accepted Answer

A)  1436 
B)  2245 
C)  872 
D)  523 
E)  117 
A)  1436 
B)  2245 
C)  872 
D)  523 
E)  117

Question 5

A put option on a stock has an exercise price of $42.If the stock price at expiration is $35,what is the option payoff for a short put position?

Accepted Answer

A)  $0 
B)  $7 
C)  -$7 
D)  $35 
E)  -$35 
A)  $0 
B)  $7 
C)  -$7 
D)  $35 
E)  -$35

Question 6

When is an option at-the-money?

Accepted Answer

An option is at-the-money when

Question 7

An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price at some future date.

Accepted Answer

A)  obligation, right 
B)  right, option 
C)  right, obligation 
D)  option, right 
E)  obligation, option 
A)  obligation, right 
B)  right, option 
C)  right, obligation 
D)  option, right 
E)  obligation, option

Question 8

The binomial option pricing model calculates the option price by creating a replicating portfolio out of a risk-free bond and the underlying stock.

Accepted Answer

A) True 
 B)False

Question 9

The price of a European put option on Power Financial Corp stock with one year to expiry is trading at $0.55,and the price of a European call option is trading at $2.15.If the exercise price of the options is $19,and the risk-free rate is 3.5%,what must be the current price of Power Financial stock?

Accepted Answer

A)  $20.00 
B)  $20.60 
C)  $21.15 
D)  $16.76 
E)  $19.96 
A)  $20.00 
B)  $20.60 
C)  $21.15 
D)  $16.76 
E)  $19.96

Question 10

The payoff to the holder of a put option is given by:

Accepted Answer

A)  P = max(K - S, 0) 
B)  P= max(S - K, 0) 
C)  P = min(S - K, 0) 
D)  P = max(K, 0) 
E)  P = max(S - K, 0) 
A)  P = max(K - S, 0) 
B)  P= max(S - K, 0) 
C)  P = min(S - K, 0) 
D)  P = max(K, 0) 
E)  P = max(S - K, 0)

Question 11

Suppose a stock is currently trading for $35,and in one period it will either increase to $38 or decrease to $33.If the one-period risk-free rate is 6%,what is the price of a European call option that expires in one period and has an exercise price of $36?

Accepted Answer

A)  $1.55 
B)  $0.80 
C)  $2.00 
D)  $1.63 
E)  $1.00 
A)  $1.55 
B)  $0.80 
C)  $2.00 
D)  $1.63 
E)  $1.00

Question 12

A call option on a stock has an exercise price of $22.25.If the stock price at expiration is $25,what is the option payoff for a long call position?

Accepted Answer

A)  $2.75 
B)  $0 
C)  -$2.75 
D)  $25 
E)  $22.25 
A)  $2.75 
B)  $0 
C)  -$2.75 
D)  $25 
E)  $22.25

Question 13

The ________ is the total number of contracts of a particular option that have been written and not yet closed.

Accepted Answer

A)  market interest 
B)  open interest 
C)  turnover 
D)  local turnover 
E)  volume 
A)  market interest 
B)  open interest 
C)  turnover 
D)  local turnover 
E)  volume

Question 14

The price of a European put option on Air Canada stock with an exercise price of $10 and one year to expiry is trading at $1.55.The current price of the stock is $11,and the risk-free rate is 5%.With no arbitrage,what must be the price of a European call on Air Canada with an exercise price of $10?

Accepted Answer

A)  $2.55 
B)  $1.07 
C)  $0.95 
D)  $1.55 
E)  $3.03 
A)  $2.55 
B)  $1.07 
C)  $0.95 
D)  $1.55 
E)  $3.03

Question 15

The price of a European put option on Scotiabank stock with one year to expiry is trading at $1.05,and the price of a European call option is trading at $3.15.If the stock is currently trading at $43.25,and the risk-free rate is 3%,what is the exercise price of the options?

Accepted Answer

A)  $41.15 
B)  $42.38 
C)  $43.25 
D)  $46.71 
E)  $39.95 
A)  $41.15 
B)  $42.38 
C)  $43.25 
D)  $46.71 
E)  $39.95

Question 16

Use the figure for the question(s) below.
  
-You have shorted a call option on WSJ stock with a strike price of $50.The option will expire in exactly six months.If the stock is trading at $45 in three months,what will you owe for each share in the contract?

Accepted Answer

A)  $0 
B)  $50 
C)  $60 
D)  $10 
E)  $40 
A)  $0 
B)  $50 
C)  $60 
D)  $10 
E)  $40

Question 17

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-Assume you want to buy five call option contracts with an exercise price closest to being at-the-money and that expires December 2010.The current price that you would have to pay for such a contract is:

Accepted Answer

A)  $550 
B)  $110 
C)  $475 
D)  $300 
E)  $525 
A)  $550 
B)  $110 
C)  $475 
D)  $300 
E)  $525

Question 18

Suppose a stock is currently trading for $12,and in one period it will either increase to $15 or decrease to $8.If the one-period risk-free rate is 4%,what is the price of a European call option that expires in one period and has an exercise price of $7?

Accepted Answer

A)  $4.68 
B)  $4.50 
C)  $5.27 
D)  $5.00 
E)  $7.00 
A)  $4.68 
B)  $4.50 
C)  $5.27 
D)  $5.00 
E)  $7.00

Question 19

Although the payouts on a long position in an options contract are never negative,the profit from purchasing and holding it could be negative.

Accepted Answer

A) True 
 B)False

Question 20

Use the figure for the question(s) below.
  
-You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to:

Accepted Answer

A)  -$1.00 
B)  $1.00 
C)  -$2.25 
D)  $2.25 
E)  $0 
A)  -$1.00 
B)  $1.00 
C)  -$2.25 
D)  $2.25 
E)  $0

Exam 13: Risk and the Pricing of Options

Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.

What effect does volatility of the underlying asset have on the price of the option?

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 in-the-money?

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -The open interest for a January 2011 call option that is closest to being at-the-money is:

A put option on a stock has an exercise price of $42.If the stock price at expiration is $35,what is the option payoff for a short put position?

When is an option at-the-money?

An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price at some future date.

The binomial option pricing model calculates the option price by creating a replicating portfolio out of a risk-free bond and the underlying stock.

The payoff to the holder of a put option is given by:

Suppose a stock is currently trading for $35,and in one period it will either increase to $38 or decrease to $33.If the one-period risk-free rate is 6%,what is the price of a European call option that expires in one period and has an exercise price of $36?

A call option on a stock has an exercise price of $22.25.If the stock price at expiration is $25,what is the option payoff for a long call position?

The ________ is the total number of contracts of a particular option that have been written and not yet closed.

The price of a European put option on Air Canada stock with an exercise price of $10 and one year to expiry is trading at $1.55.The current price of the stock is $11,and the risk-free rate is 5%.With no arbitrage,what must be the price of a European call on Air Canada with an exercise price of $10?

The price of a European put option on Scotiabank stock with one year to expiry is trading at $1.05,and the price of a European call option is trading at $3.15.If the stock is currently trading at $43.25,and the risk-free rate is 3%,what is the exercise price of the options?

Use the figure for the question(s) below. -You have shorted a call option on WSJ stock with a strike price of $50.The option will expire in exactly six months.If the stock is trading at $45 in three months,what will you owe for each share in the contract?

Suppose a stock is currently trading for $12,and in one period it will either increase to $15 or decrease to $8.If the one-period risk-free rate is 4%,what is the price of a European call option that expires in one period and has an exercise price of $7?

Although the payouts on a long position in an options contract are never negative,the profit from purchasing and holding it could be negative.

Use the figure for the question(s) below. -You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to:

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

Equity holders have an incentive to the volatility of a firm's assets because they benefit from such an increase at a cost to .

An options contract gives the owner the but not the to buy or sell an asset at a fixed price at some future date.