Question 1

When a stock price appreciates by a certain percentage,a call option on the same stock appreciates by a lower percentage amount.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)  a decrease in the time to maturity 
B)  a decrease 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)  a decrease 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

Question 3

In practice,option prices are not very sensitive to changes in the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 4

Using options to place a bet on the direction in which you believe the market is likely to move is called

Accepted Answer

A)  speculation. 
B)  hedging. 
C)  a covered position. 
D)  a naked position. 
E)  diversification. 
A)  speculation. 
B)  hedging. 
C)  a covered position. 
D)  a naked position. 
E)  diversification.

Question 5

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 $60 in three months,what will you owe for each share in the contract?

Accepted Answer

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

Question 6

ABX corporation stock is currently trading for $37.60.A one-year European call option on ABX is currently trading for $7.23,and a one-year European put option on ABX with the same strike price is currently trading for $0.76.If the stock pays no dividends,and the risk-free rate is 3% per year,what is the strike price of the options?

Accepted Answer

A)  $30.50 
B)  $46.96 
C)  $45.39 
D)  $31.13 
E)  $32.06 
A)  $30.50 
B)  $46.96 
C)  $45.39 
D)  $31.13 
E)  $32.06

Question 7

The price of a European put option on Bombardier stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.50.If the stock is currently trading at $4.75,and the risk-free rate is 4%,what is the exercise price of the options?

Accepted Answer

A)  $3.75 
B)  $3.12 
C)  $5.72 
D)  $4.75 
E)  $3.03 
A)  $3.75 
B)  $3.12 
C)  $5.72 
D)  $4.75 
E)  $3.03

Question 8

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

Accepted Answer

A) True 
 B)False

Question 9

An investor purchases a call option and its underlying stock on the same day.If the stock appreciates by 25%,the call option will appreciate by:

Accepted Answer

A)  more than 25% 
B)  less than 25% 
C)  exactly 25% 
D)  0% 
E)  less than 0% 
A)  more than 25% 
B)  less than 25% 
C)  exactly 25% 
D)  0% 
E)  less than 0%

Question 10

Luther Industries is currently trading for $27 per share.The stock pays a quarterly dividend of $0.50 per share,with the next dividend to be paid in exactly 3 months.A one-year European put option on Luther with a strike price of $30 is currently trading for $4.60.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)  $3.91 
B)  $5.03 
C)  $5.29 
D)  $1.37 
E)  $1.57 
A)  $3.91 
B)  $5.03 
C)  $5.29 
D)  $1.37 
E)  $1.57

Question 11

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-How many of the December 2010 put options are in-the-money?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
E)  5 
A)  1 
B)  2 
C)  3 
D)  4 
E)  5

Question 12

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 call options are in-the-money?

Accepted Answer

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

Question 13

The price of a call option on Microsoft stock with a maturity of six months and a strike price of $40 is $3.50,and the price of the stock is $38.50.The price of a put option on the same stock with the same strike price and time to maturity is $1.25.Calculate the risk-free rate.

Accepted Answer

A)  6.36% 
B)  9.33% 
C)  1.99% 
D)  18.52% 
E)  10.34% 
A)  6.36% 
B)  9.33% 
C)  1.99% 
D)  18.52% 
E)  10.34%

Question 14

The value of an otherwise identical American call option is ________ if the exercise date is ________.

Accepted Answer

A)  higher, longer 
B)  lower, longer 
C)  higher, closer 
D)  unchanged, closer 
E)  unchanged, longer 
A)  higher, longer 
B)  lower, longer 
C)  higher, closer 
D)  unchanged, closer 
E)  unchanged, longer

Question 15

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

Accepted Answer

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

Question 16

A share of stock can be thought of as a put option on the firm's assets with a strike price equal to the face value of debt.

Accepted Answer

A) True 
 B)False

Question 17

Suppose a stock is currently trading for $23,and in one period it will either increase to $30 or decrease to $20.If the one-period risk-free rate is 5%,what is the price of a European put option that expires in one period and has an exercise price of $25?

Accepted Answer

A)  $2.79 
B)  $2.50 
C)  $2.38 
D)  $2.21 
E)  $2.66 
A)  $2.79 
B)  $2.50 
C)  $2.38 
D)  $2.21 
E)  $2.66

Question 18

The price of a European call option on Lululemon stock with an exercise price of $34.50 and one year to expiry is trading at $2.52.The current price of the stock is $34,and the risk-free rate is 4%.With no arbitrage,what must be the price of a European put on Lululemon with an exercise price of $34.50?

Accepted Answer

A)  $3.37 
B)  $0.71 
C)  $1.69 
D)  $2.52 
E)  $0.50 
A)  $3.37 
B)  $0.71 
C)  $1.69 
D)  $2.52 
E)  $0.50

Question 19

A put 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)  obtain 
E)  purchase 
A)  sell 
B)  buy 
C)  hold 
D)  obtain 
E)  purchase

Question 20

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 call 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

Exam 13: Risk and the Pricing of Options

When a stock price appreciates by a certain percentage,a call option on the same stock appreciates by a lower percentage amount.

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

In practice,option prices are not very sensitive to changes in the risk-free rate.

Using options to place a bet on the direction in which you believe the market is likely to move is called

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 $60 in three months,what will you owe for each share in the contract?

The price of a European put option on Bombardier stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.50.If the stock is currently trading at $4.75,and the risk-free rate is 4%,what is the exercise price of the options?

A European option with a later exercise date may trade potentially for less than an otherwise identical option with an earlier exercise date.

An investor purchases a call option and its underlying stock on the same day.If the stock appreciates by 25%,the call option will appreciate by:

Use the table for the question(s) below. Consider the following information on options from the CBOE for Merck: -How many of the December 2010 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: -How many of the January 2009 call options are in-the-money?

The price of a call option on Microsoft stock with a maturity of six months and a strike price of $40 is $3.50,and the price of the stock is $38.50.The price of a put option on the same stock with the same strike price and time to maturity is $1.25.Calculate the risk-free rate.

The value of an otherwise identical American call option is ________ if the exercise date is ________.

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

A share of stock can be thought of as a put option on the firm's assets with a strike price equal to the face value of debt.

Suppose a stock is currently trading for $23,and in one period it will either increase to $30 or decrease to $20.If the one-period risk-free rate is 5%,what is the price of a European put option that expires in one period and has an exercise price of $25?

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

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 call options are out-of-the-money?

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

The value of an otherwise identical American call option is if the exercise date is .