Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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 C

Question 3

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 B

Question 4

When is an option at-the-money?

Accepted Answer

An option is at-the-money when

Question 5

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 6

The value of a call option ________ with the risk-free rate,and the value of a put option ________ with the risk-free rate.

Accepted Answer

A) increases,increases 
B) decreases,decreases 
C) increases,decreases 
D) decreases,increases 
E) increases,does not change 
A) increases,increases 
B) decreases,decreases 
C) increases,decreases 
D) decreases,increases 
E) increases,does not change

Question 7

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 8

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 9

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 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?

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

The higher the volat

Question 13

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

Accepted Answer

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

Question 14

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 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

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 17

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 18

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 call option that expires in one period and has an exercise price of $25?

Accepted Answer

A) $1.25 
B) $1.98 
C) $1.50 
D) $2.21 
E) $2.50 
A) $1.25 
B) $1.98 
C) $1.50 
D) $2.21 
E) $2.50

Question 19

A put option on a stock has an exercise price of $31.If the stock price at expiration is $29.45,what is the option payoff for a long put position?

Accepted Answer

A) $29.45 
B) $0 
C) $1.55 
D) -$1.55 
E) -$29.45 
A) $29.45 
B) $0 
C) $1.55 
D) -$1.55 
E) -$29.45

Question 20

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.

Exam 13: Risk and the Pricing of Options

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

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

When is an option at-the-money?

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?

The value of a call option ________ with the risk-free rate,and the value of a put option ________ with the risk-free rate.

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?

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

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?

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

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

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

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

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

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?

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 call option that expires in one period and has an exercise price of $25?

A put option on a stock has an exercise price of $31.If the stock price at expiration is $29.45,what is the option payoff for a long put position?

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

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 value of a call option with the risk-free rate,and the value of a put option with the risk-free rate.