Question 1

Figure 3 depicts the:

Accepted Answer

A) position diagram for the writer (seller)of a call option. 
B) profit diagram for the writer (seller)of a call option. 
C) position diagram for the writer (seller)of a put option. 
D) profit diagram for the writer (seller)of a put option. 
A) position diagram for the writer (seller)of a call option. 
B) profit diagram for the writer (seller)of a call option. 
C) position diagram for the writer (seller)of a put option. 
D) profit diagram for the writer (seller)of a put option. D

Question 2

Explain the main differences between position diagrams and profit diagrams.

Accepted Answer

Position diagrams show payoffs at option exercise.Share price is plotted on the x-axis and option value on the y-axis.They are useful in analyzing the position of option buyers and sellers at exercise.They do not consider the cost of options.Profit diagrams on the other hand include the cost of options.Profit diagrams provide a clearer picture of profits and losses resulting from trading in options.They are also helpful in analyzing trading strategies.However,profit diagrams do not distinguish the time value of the purchase cost of the option from its payoffs,plotting both on the same diagram at their nominal amounts.

Question 3

Suppose the underlying stock pays a dividend before the expiration of options on that stock.This will:
I.increase the value of a call option;
II.increase the value of a put option;
III.decrease the value of a call option;
IV.decrease the value of a put option

Accepted Answer

A) I and II only 
B) III and IV only 
C) I and IV only 
D) II and III only 
A) I and II only 
B) III and IV only 
C) I and IV only 
D) II and III only D

Question 4

The writer of a put option loses if the stock price declines.

Accepted Answer

A) True 
 B)False

Question 5

Relative to the underlying stock,a call option always has:

Accepted Answer

A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return. 
A) a higher beta and a higher standard deviation of return. 
B) a lower beta and a higher standard deviation of return. 
C) a higher beta and a lower standard deviation of return. 
D) a lower beta and a lower standard deviation of return.

Question 6

The value of a call option increases as the volatility of the underlying stock price increases.

Accepted Answer

A) True 
 B)False

Question 7

A profit diagram implicitly neglects the time value of money.

Accepted Answer

A) True 
 B)False

Question 8

All else equal,as the underlying stock price increases:

Accepted Answer

A) the put price increases. 
B) the put price decreases. 
C) there is no effect on put price. 
D) the put price can either increase,decrease,or remain the same. 
A) the put price increases. 
B) the put price decreases. 
C) there is no effect on put price. 
D) the put price can either increase,decrease,or remain the same.

Question 9

Buying the stock and the put option on the stock provides the same payoff as:

Accepted Answer

A) investing the present value of the exercise price in T-bills and buying the call option on the stock. 
B) short-selling the stock and buying a call option on the stock. 
C) writing (selling)a put option and buying a call option on the stock. 
D) a T-bill. 
A) investing the present value of the exercise price in T-bills and buying the call option on the stock. 
B) short-selling the stock and buying a call option on the stock. 
C) writing (selling)a put option and buying a call option on the stock. 
D) a T-bill.

Question 10

An American call option gives its owner the right to buy stock at a fixed strike price during a specified period of time.

Accepted Answer

A) True 
 B)False

Question 11

All else equal,options written on volatile assets are worth more than options written on safer assets.

Accepted Answer

A) True 
 B)False

Question 12

Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5% per year.Using put-call parity,calculate the price of a put option having the same exercise price and expiration date.

Accepted Answer

A) $3.07 
B) $5.19 
C) $11.43 
D) $3.42Value of put = value of call - share price + PV of exercise price 
A) $3.07 
B) $5.19 
C) $11.43 
D) $3.42Value of put = value of call - share price + PV of exercise price

Question 13

If the risk-free interest rate increases,then:

Accepted Answer

A) call option prices increase. 
B) call option prices decrease. 
C) call option prices remain the same. 
D) call option prices can either increase,decrease,or remain the same. 
A) call option prices increase. 
B) call option prices decrease. 
C) call option prices remain the same. 
D) call option prices can either increase,decrease,or remain the same.

Question 14

The writer (seller)of a regular exchange-listed put-option on a stock:

Accepted Answer

A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price. 
A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Question 15

Which of the following investors would be happy to see the stock price rise sharply?
I.An investor who owns the stock and a put option;
II.An investor who has sold a put option and bought a call option;
III.An investor who owns the stock and has sold a call option;
IV.An investor who has sold a call option

Accepted Answer

A) I and II only 
B) III and IV only 
C) III only 
D) IV only 
A) I and II only 
B) III and IV only 
C) III only 
D) IV only

Question 16

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

Accepted Answer

A) value of the put option will increase,but the value of the call option will decrease. 
B) value of the put option will decrease,but the value of the call option will increase. 
C) value of both the put and call option will increase. 
D) value of both the put and call option will decrease. 
A) value of the put option will increase,but the value of the call option will decrease. 
B) value of the put option will decrease,but the value of the call option will increase. 
C) value of both the put and call option will increase. 
D) value of both the put and call option will decrease.

Question 17

Define the term put option.

Accepted Answer

A put option is defined as a r

Question 18

An investor can get downside protection on the purchase of stock by buying a put option.

Accepted Answer

A) True 
 B)False

Question 19

The buyer of a call option has the right to exercise the option,but the writer of the call option has the:

Accepted Answer

A) choice to offset with a put option upon exercise. 
B) obligation to deliver the shares at the exercise price. 
C) choice to deliver shares or take a cash payoff. 
D) obligation to deliver a put option upon exercise. 
A) choice to offset with a put option upon exercise. 
B) obligation to deliver the shares at the exercise price. 
C) choice to deliver shares or take a cash payoff. 
D) obligation to deliver a put option upon exercise.

Question 20

Briefly explain what is meant by put-call parity?

Accepted Answer

The relationship between the value of a

Exam 20: Understanding Options

Figure 3 depicts the:

Explain the main differences between position diagrams and profit diagrams.

Suppose the underlying stock pays a dividend before the expiration of options on that stock.This will: I.increase the value of a call option; II.increase the value of a put option; III.decrease the value of a call option; IV.decrease the value of a put option

The writer of a put option loses if the stock price declines.

Relative to the underlying stock,a call option always has:

The value of a call option increases as the volatility of the underlying stock price increases.

A profit diagram implicitly neglects the time value of money.

All else equal,as the underlying stock price increases:

Buying the stock and the put option on the stock provides the same payoff as:

An American call option gives its owner the right to buy stock at a fixed strike price during a specified period of time.

All else equal,options written on volatile assets are worth more than options written on safer assets.

Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5% per year.Using put-call parity,calculate the price of a put option having the same exercise price and expiration date.

If the risk-free interest rate increases,then:

The writer (seller)of a regular exchange-listed put-option on a stock:

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

Define the term put option.

An investor can get downside protection on the purchase of stock by buying a put option.

The buyer of a call option has the right to exercise the option,but the writer of the call option has the:

Briefly explain what is meant by put-call parity?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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