Question 1

Using options to reduce risk is called

Accepted Answer

A)  speculation. 
B)  a naked position. 
C)  hedging. 
D)  a covered position. 
E)  risk-taking. 
A)  speculation. 
B)  a naked position. 
C)  hedging. 
D)  a covered position. 
E)  risk-taking.

Question 2

The writer of a call option has

Accepted Answer

A)  the obligation to sell a security for a given price. 
B)  the obligation to buy a security for a given price. 
C)  the right to sell a security for a given price. 
D)  the right to buy a security for a given price. 
E)  the long position in the contract. 
A)  the obligation to sell a security for a given price. 
B)  the obligation to buy a security for a given price. 
C)  the right to sell a security for a given price. 
D)  the right to buy a security for a given price. 
E)  the long position in the contract.

Question 3

When the exercise price of a call option is lower 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 4

A share of stock is a ________ option on the value of assets of the firm with a strike price equal to ________.

Accepted Answer

A)  put option, face value of debt 
B)  call option, market value of equity 
C)  call option, face value of debt 
D)  put option, market value of equity 
E)  put option, market value of debt 
A)  put option, face value of debt 
B)  call option, market value of equity 
C)  call option, face value of debt 
D)  put option, market value of equity 
E)  put option, market value of debt

Question 5

ABX corporation is currently trading for $45 per share.The stock will pay a one-time dividend of $2.25 in exactly 3 months.A one-year European call option on ABX with a strike price of $50 is currently trading for $2.40.If the risk-free interest rate is 9% per year,then the price of a one-year European put option on ABX with a strike price of $50 will be closest to:

Accepted Answer

A)  $3.73 
B)  $5.47 
C)  $0.88 
D)  $5.52 
E)  $1.07 
A)  $3.73 
B)  $5.47 
C)  $0.88 
D)  $5.52 
E)  $1.07

Question 6

What is a call option?

Accepted Answer

A call option gives the owner

Question 7

What are American options?

Accepted Answer

American options,the most comm

Question 8

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

Accepted Answer

A) True 
 B)False

Question 9

A protective put written on a portfolio (rather than a single stock)is known as

Accepted Answer

A)  portfolio insurance. 
B)  put-call parity. 
C)  a warrant. 
D)  Black-Scholes. 
E)  diversification. 
A)  portfolio insurance. 
B)  put-call parity. 
C)  a warrant. 
D)  Black-Scholes. 
E)  diversification.

Question 10

What are European options?

Accepted Answer

European options,allow their h

Question 11

The price of a European put option on Potash Corp stock with an exercise price of $48 and one year to expiry is trading at $4.15.The current price of the stock is $45,and the risk-free rate is 3%.With no arbitrage,what must be the price of a European call on Potash Corp with an exercise price of $48?

Accepted Answer

A)  $2.55 
B)  $5.75 
C)  $3.00 
D)  $2.91 
E)  $0.16 
A)  $2.55 
B)  $5.75 
C)  $3.00 
D)  $2.91 
E)  $0.16

Question 12

Suppose you purchase a call option for $5 and a strike price of $20.On the expiration day,the price of the stock is $30.What is the return on the call option if you hold your position until maturity?

Accepted Answer

A)  25% 
B)  50% 
C)  75% 
D)  100% 
E)  0% 
A)  25% 
B)  50% 
C)  75% 
D)  100% 
E)  0%

Question 13

Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
  
-Assume you want to buy one options contract with an exercise price closest to being at-the-money and that expires January 2009.The current price that you would have to pay for such a contract is:

Accepted Answer

A)  $680 
B)  $380 
C)  $650 
D)  $420 
E)  $450 
A)  $680 
B)  $380 
C)  $650 
D)  $420 
E)  $450

Question 14

A call option on a stock has an exercise price of $34.50.If the stock price at expiration is $37.50,what is the option payoff for a short call position?

Accepted Answer

A)  $34.50 
B)  $0 
C)  $3 
D)  -$3 
E)  -$34.50 
A)  $34.50 
B)  $0 
C)  $3 
D)  -$3 
E)  -$34.50

Question 15

When the exercise price of an option is equal to 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 16

Options are also called derivative assets because they derive their value solely from the price of another asset.

Accepted Answer

A) True 
 B)False

Question 17

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 2009 put option that is closest to being at-the-money is:

Accepted Answer

A)  7174 
B)  982 
C)  319 
D)  8422 
E)  5513 
A)  7174 
B)  982 
C)  319 
D)  8422 
E)  5513

Question 18

A put option on a stock has an exercise price of $74.If the stock price at expiration is $79,what is the option payoff for a long put position?

Accepted Answer

A)  $0 
B)  $5 
C)  -$5 
D)  $79 
E)  -$79 
A)  $0 
B)  $5 
C)  -$5 
D)  $79 
E)  -$79

Question 19

American options allow their holders to exercise the option only on the expiration date.

Accepted Answer

A) True 
 B)False

Question 20

The Black-Scholes formula is notable because it does not require us to know

Accepted Answer

A)  the expected return on a stock. 
B)  the risk-free rate. 
C)  the volatility of the stock. 
D)  the dividend rate on the stock. 
E)  the stock price. 
A)  the expected return on a stock. 
B)  the risk-free rate. 
C)  the volatility of the stock. 
D)  the dividend rate on the stock. 
E)  the stock price.

Exam 13: Risk and the Pricing of Options

Using options to reduce risk is called

The writer of a call option has

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

A share of stock is a ________ option on the value of assets of the firm with a strike price equal to ________.

What is a call option?

What are American options?

Standard stock options are traded and bought and sold through dealers only and cannot be bought via an exchange.

A protective put written on a portfolio (rather than a single stock)is known as

What are European options?

Suppose you purchase a call option for $5 and a strike price of $20.On the expiration day,the price of the stock is $30.What is the return on the call option if you hold your position until maturity?

A call option on a stock has an exercise price of $34.50.If the stock price at expiration is $37.50,what is the option payoff for a short call position?

When the exercise price of an option is equal to the current price of the stock,the option is said to be

Options are also called derivative assets because they derive their value solely from the price of another asset.

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 2009 put option that is closest to being at-the-money is:

A put option on a stock has an exercise price of $74.If the stock price at expiration is $79,what is the option payoff for a long put position?

American options allow their holders to exercise the option only on the expiration date.

The Black-Scholes formula is notable because it does not require us to know

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 share of stock is a option on the value of assets of the firm with a strike price equal to .