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

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 3

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 4

A one-year European call option on ABX corporation with a strike price of $50 is currently trading for $1.45,and a one-year European put option on ABX with the same strike price is currently trading for $6.22.If the stock pays a one-time dividend of $1.50 in exactly 6 months,and the risk-free rate is 8% per year,what is the current price of ABX stock?

Accepted Answer

A) $42.97 
B) $43.03 
C) $49.63 
D) $52.53 
E) $55.41 
A) $42.97 
B) $43.03 
C) $49.63 
D) $52.53 
E) $55.41

Question 5

What is a call option?

Accepted Answer

A call option gives the owner

Question 6

A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?

Accepted Answer

A) $-11 
B) $11 
C) $1.15 
D) -$1.15 
E) $0 
A) $-11 
B) $11 
C) $1.15 
D) -$1.15 
E) $0

Question 7

Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation,what does the term C represent?

Accepted Answer

A) the value of the call option 
B) the stock's current price 
C) the payoff of a zero-coupon bond 
D) the strike price of the option 
E) the value of the put option 
A) the value of the call option 
B) the stock's current price 
C) the payoff of a zero-coupon bond 
D) the strike price of the option 
E) the value of the put option

Question 8

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 9

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 10

Suppose you purchase a call option for $4 and a strike price of $30.On the expiration day,the price of the stock is $40.What is the return on the call option if you hold your position until maturity?

Accepted Answer

A) 125% 
B) 130% 
C) 150% 
D) 170% 
E) 250% 
A) 125% 
B) 130% 
C) 150% 
D) 170% 
E) 250%

Question 11

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 12

Using an option to reduce the risk of a portfolio is called ________,while using options to bet on the direction of the market or an asset is called ________.

Accepted Answer

A) hedging,speculation 
B) hedging,verification 
C) verification,hedging 
D) speculation,hedging 
E) verification,speculation 
A) hedging,speculation 
B) hedging,verification 
C) verification,hedging 
D) speculation,hedging 
E) verification,speculation

Question 13

How many of the January 2009 put 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

Question 14

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 15

A one-year European call option on ABX corporation with a strike price of $50 is currently trading for $4.30,and a one-year European put option on ABX with the same strike price is currently trading for $1.47.If the stock pays no dividends and the risk free rate is 4% per year,what is the current price of ABX stock?

Accepted Answer

A) $39.79 
B) $41.57 
C) $45.25 
D) $50.91 
E) $53.85 
A) $39.79 
B) $41.57 
C) $45.25 
D) $50.91 
E) $53.85

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

Hedging is accomplished by holding contracts or securities whose payoffs are positively correlated with some risk exposure that already exists.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Exam 13: Risk and the Pricing of Options

Using options to reduce risk is called:

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?

How many of the December 2010 put options are in-the-money?

What is a call option?

A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?

Consider the following equation: C = P + S - PV(K)- PV(Div) In this equation,what does the term C represent?

The open interest for a January 2009 put option that is closest to being at-the-money is:

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

Suppose you purchase a call option for $4 and a strike price of $30.On the expiration day,the price of the stock is $40.What is the return on the call option if you hold your position until maturity?

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

Using an option to reduce the risk of a portfolio is called ________,while using options to bet on the direction of the market or an asset is called ________.

How many of the January 2009 put options are out-of-the-money?

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

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.

Hedging is accomplished by holding contracts or securities whose payoffs are positively correlated with some risk exposure that already exists.

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

The writer of a call option has:

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

Using an option to reduce the risk of a portfolio is called ,while using options to bet on the direction of the market or an asset is called .

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