Deck 17: Options Amcq Corporate Finance

Question 1

Selling a covered call is equivalent to

A)selling a put and buying the underlying stock.
B)buying a put and selling a zero coupon bond.
C)selling a put and selling the underlying stock.
D)buying the underlying stock and selling a put.
E)buying a zero coupon bond and selling a put.

Answer 1

buying a zero coupon bond and selling a put.

Question 2

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's

A)opening price.
B)intrinsic value.
C)market price.
D)strike price.
E)time value.

Answer 2

strike price.

Question 3

Which term applies to the purchase or sale of an underlying asset via an option contract?

A)Exercising the option
B)Striking the price
C)Opening the bid
D)Splitting the security
E)Expiring the option

Answer 3

Exercising the option

Question 4

A 35 put option on FKL stock expires today.The current price of the stock is $36.The put is

A)at the money.
B)out of the money.
C)in the money.
D)funded.
E)unfunded.

Question 5

The minimum payoff to the seller of a put is

A)zero.
B)a loss equal to the stock price.
C)a loss equal to the exercise price.
D)equal to the exercise price minus the stock price.
E)unlimited.

Question 6

A ________ is a derivative security that grants the owner the right,but not the obligation,to buy an asset at a fixed price during a specified period of time.

A)call option
B)futures contract
C)put option
D)swap
E)forward contract

Question 7

The intrinsic value of a put is equal to the:

A)lesser of the stock price minus the exercise price or zero.
B)greater of the strike price minus the stock price or zero.
C)lesser of the stock price or zero.
D)lesser of the strike price or the stock price.
E)greater of the stock price minus the exercise price or zero.

Question 8

The ticker symbol for a stock option indicates all of the following except the

A)underlying stock.
B)expiration date.
C)intrinsic value.
D)type of option.
E)strike price.

Question 9

The seller of a call option makes the most profit when the option

A)is exercised immediately.
B)expires without being exercised.
C)is in the money.
D)is converted into shares.
E)is not exercised until the expiration date.

Question 10

Eduardo owns an option that gives him the right to purchase shares of ABC stock at a price of $18 a share.Currently,the stock is selling for $21.60.He would like to profit on this stock but is not permitted to exercise his option for another 2 weeks.Contrary to other investors,he believes the stock price will decline significantly over the next 2 weeks.Given this situation,he should

A)sell his option today.
B)buy call options today that expire in 2 weeks.
C)wait for 2 weeks and then immediately exercise his option.
D)purchase shares of ABC today and then sell his option in 2 weeks.
E)just forget about it because he cannot profit from this situation.

Question 11

Carie opted to exercise her May option on April 3^rd and received $1,750 in exchange for her shares.She must have owned a(n)

A)warrant.
B)American call.
C)American put.
D)European put.
E)European call.

Question 12

Which one of the following statements correctly describes your situation as the owner of an American call option?

A)You are obligated to buy at a set price at any time up to and including the expiration date.
B)You have the right to sell at a set price at any time up to and including the expiration date.
C)You have the right to buy at a set price only on the expiration date.
D)You are obligated to sell at a set price if the option is exercised.
E)You have the right to buy at a set price at any time up to and including the expiration date.

Question 13

An ________ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price on the expiration date.

A)American call option
B)European put option
C)American put option
D)Euro-American swap
E)European call option

Question 14

An option that can only be exercised on the expiration date is referred to as

A)an expired option.
B)an American option.
C)a struck option.
D)a European option.
E)an expiring option.

Question 15

The maximum payoff to the seller of a call is

A)zero.
B)equal to the stock price.
C)equal to the exercise price.
D)not quantifiable.
E)unlimited.

Question 16

The seller of a put option on 100 shares of stock makes the most profit when the

A)option is exercised immediately.
B)stock price exceeds the exercise price throughout the option period.
C)exercise price exceeds the stock price throughout the option period.
D)option is converted into shares.
E)is not exercised until the expiration date.

Question 17

The seller of a European call option has the

A)obligation to sell the underlying stock at the strike price if the option is exercised.
B)right but not the obligation to exercise the option on the expiration date.
C)obligation to buy a stock on a specified date but only at the specified price.
D)obligation to buy a stock sometime during a specified period of time at the specified price.
E)obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.

Question 18

Which one of these combinations is a protective put?

A)Writing identical puts and calls on the same asset
B)Buying a put and buying the underlying asset
C)Selling a call and buying the underlying asset
D)Buying a call and selling the underlying asset
E)Selling a put and buying the underlying asset

Question 19

Stock option quotes are

A)quoted as the price for each 100-share contract.
B)quoted on a per-share basis with each contract covering 1,000 shares.
C)quoted on a per-share basis with each contract covering a single share.
D)based on a 1,000-share contract and quoted as a price per contract.
E)based on a 100-share contract with the quote stated on a per-share basis.

Question 20

The difference between an American call and a European call is that the American call

A)has a fixed exercise price while the European exercise price can vary within a small range.
B)is a right to buy while a European call is an obligation to buy.
C)has an expiration date while the European call does not.
D)can be exercised at any time up to and including the expiration date while the European call can only be exercised on the expiration date.
E)is written on 100 shares of the underlying stock while the European call is based on 10 shares of the underlying stock.

Question 21

You can realize the same value as that derived from stock ownership if you

A)sell a put option and invest at the risk-free rate of return.
B)sell a put and buy a call on the stock as well as invest at the risk-free rate of return.
C)buy a call option and write a put option on a stock and also lend out funds at the risk-free rate.
D)lend out funds at the risk-free rate of return and sell a put option on the stock.
E)borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

Question 22

Which variable within the Black-Scholes option pricing formula is the delta?

A)S
B)e^−Rt
C)N(d₂)
D)N(d₁)
E)E

Question 23

You own an October 12 call and an October 12 put on SC stock.If the call finishes in the money,then the put will

A)also finish in the money.
B)finish out of the money.
C)finish at the money.
D)either finish at the money or out of the money.
E)either finish at the money or in the money.

Question 24

Which of the following statements are correct concerning option values,all else held constant? I.The value of an in-the-money call increases as the price of the underlying stock increases.
II)The value of a call decreases as the exercise price increases.
III)The value of an in-the-money put increases as the price of the underlying stock increases.
IV)The value of a put decreases as the exercise price increases.

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

Question 25

The lower bound on a call's value is the:

A)stock price minus the exercise price or zero,whichever is greater.
B)strike price or zero,whichever is greater.
C)strike price or zero,whichever is lower.
D)strike price or the stock price,whichever is lower.
E)stock price minus the exercise price or zero,whichever is lower.

Question 26

Assume you own both a June 20 put and a June 20 call on ALPO stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

A)Both a May 20 put and a May 20 call on ALPO will have higher values than your June 20 options.
B)An increase in the stock price will increase the value of your put and decrease the value of your call.
C)A decrease in the stock price will decrease the value of both of your options.
D)If put-call parity does not hold,you can profit from your positions even if ALPO stock sells for $20 a share.
E)The time premium on your June 20 put is equal to the time premium on a July 20 put on ALPO.

Question 27

Assuming all else equal,the value of an in-the-money call increases when the I.time to expiration increases.
II)stock price increases.
III)risk-free rate of return increases.
IV)volatility of the price of the underlying stock increases.

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

Question 28

If a call has a positive intrinsic value at expiration,the call is said to be

A)at the money.
B)out of the money.
C)in the money.
D)funded.
E)unfunded.

Question 29

Which one of these will increase both the value of a call and the value of a put?

A)Decrease in the exercise price
B)Increase in the stock price
C)Decrease in the interest rate
D)Increase in stock volatility
E)Decrease in time to expiration

Question 30

Which one of the Black-Scholes formula parameters must be estimated?

A)Stock price
B)Interest rate
C)Time to expiration
D)Variance of the return
E)Exercise price

Question 31

Given an exercise price,E,time to maturity,t,and European put-call parity,the present value of the strike price plus the value of the call option on the stock is equal to the

A)price of the stock plus the price of the put option.
B)present value of the stock minus the put option.
C)price of the put option minus the market value of the stock.
D)value of risk-free security,such as a U.S.Treasury bill.
E)current market value of the stock.

Question 32

The relationship between a change in the price of a stock and the related change in the price of the call on that stock is referred to as the option

A)vega.
B)theta.
C)rho.
D)gamma.
E)delta.

Question 33

The value of an option if it were to immediately expire is called the option's ________ value.

A)strike
B)time
C)intrinsic
D)volatility
E)market

Question 34

An increase in which one of these will decrease the value of a call option and increase the value of a put option?

A)Stock price
B)Time to expiration
C)Stock volatility
D)Interest rate
E)Exercise price

Question 35

In the Black-Scholes option pricing model,what does the variable R represent?

A)The annually compounded risk-free rate of return
B)The continuously compounded variance
C)The continuously compounded annual risk-free rate of return
D)The annually compounded market rate of return
E)The continuously compounded market rate of return

Question 36

The intrinsic value of a call is I.the value of the call if it were to expire today.
II)equal to the lower bound of a call's value.
III)another name for the market price of a call.
IV)always equal to zero if the call is currently out of the money.

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

Question 37

In the Black-Scholes option pricing formula,N(d)is the probability that a standardized,normally distributed random variable is:

A)greater than or equal to d.
B)less than one.
C)equal to one.
D)equal to d.
E)less than or equal to d.

Question 38

Which one of the following will cause the value of a call to decrease?

A)Lowering the risk level of the underlying security
B)Increasing the time to expiration
C)Increasing the risk-free rate
D)Lowering the exercise price
E)Increasing the stock price

Question 39

Assume N(d₂)= N(3.0155)= 0.9987.Given this assumption,a drawing from the standardized normal distribution has a ________ percent probability of being less than ________.

A)3)0155;0.9987
B)0)13;3.0155
C)99.87;3.0155
D)0)0013;.9987
E)0)9987;3.0155

Question 40

The relationship between the prices of the underlying stock,a call option,a put option,and a riskless asset is referred to as the ________ relationship.

A)covered call
B)put-call parity
C)protective put
D)straddle
E)strangle

Question 41

A 4-month ABC $30 call is priced at $1.50 while the 4-month ABC put is priced at $2.20.Risk-free assets are currently returning 0.25 percent per month.What is the price of ABC stock?

A)$29
B)$27
C)$31
D)$34
E)$30

Question 42

You purchased three WXO 15 call option contracts at a quoted price of $.44.What is your net gain or loss on this investment if the price of WXO is $15.70 on the option expiration date?

A)−$132
B)−$116
C)$78
D)$54
E)$109

Question 43

The market price of Wild Ride stock has been very volatile,and you think this volatility will continue for a few weeks.Thus,you decide to purchase a 1-month call option contract with a strike price of $45 and an option price of $1.15.You also purchase a 1-month put option on the stock with a strike price of $50 and an option price of $.95.What will be your total profit or loss on all the transactions related to these option positions if the stock price is $44.40 on the day the options expire?

A)$315
B)$290
C)−$210
D)$350
E)−$105

Question 44

Hilltop stock has a current market price of $58.10 a share.The 1-year $55 call is priced at $3.75 while the 1-year $55 put is priced at $.42.What is the risk-free rate of return?

A).42%
B).87%
C).48%
D).76%
E)1.09%

Question 45

High Tower stock is selling for $32.08 a share,the $30 puts are priced at $.62,and the $30 calls are priced at $2.36.How much will you receive if you write twenty $30 put option contracts?

A)$1,080
B)$1,240
C)$10.80
D)$12.40
E)$4,720

Question 46

RTF stock is currently priced at $21.06 a share.The only options on this stock are the August $25 call option,which is priced at $.32,and the August $25 put which is priced at $3.98.Flo would like the option to purchase 500 shares of RTF should the price suddenly rise as she expects.Her main concern is that the price will double after hours and she will miss out on some potential profits.She also realizes the stock is highly risky,and she could lose her entire investment,which she prefers not to do.What should she do to help offset her concerns?

A)Sell 500 put option contracts and receive $1,990
B)Sell five call option contracts and receive $1.60
C)Buy 500 call option contracts at a cost of $160
D)Buy five put option contracts at a cost of $19.90
E)Buy five call option contracts at a cost of $160

Question 47

Jeanette just purchased 100 shares of HE stock along with a $30 put option contract on HE.During the life of the option contract,the minimum value of her combined holdings will be ________ and the maximum value will be ________.

A)$0;$1,500.
B)$0;$3,000.
C)$1,500;$3,000
D)$0;Unlimited
E)$3,000;Unlimited

Question 48

The 1-year $35 options on Water Kingdom stock are priced at $1.32 for the call and $.25 for the put.The annual risk-free rate is 1.8 percent.What is the per share price of the underlying stock?

A)$33.59
B)$35.45
C)$36.40
D)$35.33
E)$34.41

Question 49

If you express a firm in terms of put options,the

A)current value of the firm is the exercise price.
B)option will always be in the money.
C)stockholders will be considered as the firm's owners.
D)bondholders determine whether or not the option will be exercised.
E)bondholders are the buyers of the put.

Question 50

Pure Aqua stock is selling for $37.28 a share.One $37.50 call is valued at $1.02 and one $35 put is valued at $.13.What is the value of four call option contracts?

A)$4.08
B)$2.96
C)$296.00
D)$408.00
E)$0

Question 51

You purchased four TJH call option contracts with a strike price of $35 when the option was quoted at $.68.The option expires today when the value of TJH stock is $36.90.Ignoring trading costs and taxes,what is your total profit or loss on your investment?

A)$510.00
B)$488.00
C)$429.70
D)$620.00
E)$489.50

Question 52

Robotic stock is selling for $68.90 a share.One $50 call contract is valued at $19.05,and one $65 put contract is valued at $0.72.What is the per share intrinsic value of the put?

A)$0
B)$)72
C)$3.90
D)$3.18
E)$72.00

Question 53

The value of a risky bond is equal to the value of

A)a call option plus the value of a default-free bond.
B)the put option plus the value of a default-free bond.
C)a default-free bond minus the value of the call option.
D)a default-free bond minus the value of the put option.
E)a default-free bond minus the value of the put plus the value of the call.

Question 54

The 3-month $40 options on Leeway Motors stock are priced at $.22 for the call and $1.54 for the put.The risk-free rate is 0.3 percent per month.What is the per share price of the underlying stock?

A)$41.79
B)$40.91
C)$40.23
D)$38.32
E)$39.14

Question 55

IOU stock is selling for $39.40 a share.The 6-month $40 call costs $1.20.Risk-free assets are currently returning 0.15 percent per month.What is the price of the 6-month $40 put?

A)$1.74
B)$)96
C)$1.03
D)$1.21
E)$1.44

Question 56

You wrote five call option contracts on MNO stock with a strike price of $25 and an option price of $.70.What is your total net profit or loss on all transactions related to this investment if the price of MNO is $24.70 on the option expiration date? Ignore taxes and transaction costs.

A)−$500
B)$350
C)−$350
D)$500
E)$425

Question 57

You own stock in a firm that has a pure discount loan due in 6 months.The loan has a face value of $50,000.The assets of the firm are currently worth $62,000.The stockholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________.

A)put;$62,000.
B)call;$50,000.
C)warrant;$62,000.
D)call;$62,000.
E)put;$50,000.

Question 58

A government guarantee of a firm's existing debt

A)has a cost equal to that of a put option.
B)benefits shareholders at the expense of current bondholders.
C)converts risk-free debt into risky debt.
D)is costless to taxpayers.
E)is essentially exercising a call option on the firm.

Question 59

A 1-month $15 call option on BRU stock is priced at $1.45 while the 1-month $20 put option is priced at $3.45.Which one of these is the best estimate of the current price of one share of BRU stock?

A)$14.50
B)$16.50
C)$15.00
D)$16.00
E)$15.50

Question 60

If you consider the equity of a firm to be an option on the firm's assets,then the act of paying off debt is comparable to ________ on the assets of the firm.

A)purchasing a put option
B)purchasing a call option
C)exercising an in-the-money call option
D)exercising an in-the-money put option
E)selling a call option

Question 61

Benny's is reviewing a $462,000 project that is expected to increase the firm's equity by $141,300 What is the project's delta?

A)0)2889
B)0)3058
C)0)2948
D)0)3103
E)0)2701

Question 62

Rita owns six put option contracts on Farmington stock with an exercise price of $27.50.What is the total intrinsic value of these contracts if the stock is currently selling for $26.98 a share?

A)−$624
B)−$312
C)$0
D)$312
E)$624

Question 63

Katie D's has total assets valued at $3,160.These assets are expected to be worth either $2,900 or $3,300 by next year.One year from now,the company must repay a $3,100 pure discount bond.The risk-free rate is 4.2 percent.What is the current value of the firm's debt?

A)$2,616.98
B)$2,971.55
C)$2,830.50
D)$2,886.79
E)$3,023.33

Question 64

The Bakery's assets are currently valued at $2,306.These assets are expected to be worth either $2,100 or $2,600 one year from now.The company has a pure discount bond outstanding with a $2,500 face value and a maturity date of 1 year.The risk-free rate is 2.6 percent.What is the value of the equity in this firm?

A)$51.84
B)$31.42
C)$85.71
D)$105.15
E)$114.29

Question 65

Wilt's has a stock price of $38 a share.The 9-month options have a strike price of $45.The risk-free rate is 3.2 percent,the standard deviation is 21 percent,N(d₁)is 0.23985 and N(d₂)is 0.18710.What is the call price?

A)$)68
B)$)89
C)$1.03
D)$1.21
E)$1.17

Question 66

A stock is selling for $52 a share.The 3-month options have an exercise price of $55.The risk-free rate is 3.2 percent,the standard deviation is 19 percent,and the d₁ value is -0.4587.What is the value of d₂ as it applies to the Black-Scholes option pricing model?

A)−0.46081
B)−0.55370
C)−0.24601
D)−0.17069
E)−0.02307

Question 67

High Mountain has a stock price of $31 a share.The 6-month options have a strike price of $30.The risk-free rate is 3.1 percent and the standard deviation of returns is 26 percent.The value of d₁ is 0.35459.What is the value of d₂ as it is used in the Black-Scholes option pricing model?

A)0)19091
B)0)23048
C)0)17176
D)0)19323
E)0)17074

Question 68

Assume the delta of a call option on a firm's assets is 0.481.This means that a new $498,000 project will increase the value of equity by

A)$336,259
B)$349,725
C)$239,538
D)$280,790
E)$208,244

Question 69

You sold a $25 put contract on EDF stock at an option price of $1.10.What does the stock price have to be for you to break even on this contract?

A)$25.00
B)$23.90
C)$1.10
D)$26.10
E)$0

Question 70

Allison's Market is currently valued at $68,400.The firm has a pure discount bond in the amount of $50,000 that is due in 1 year.The risk-free rate is 3.2 percent.What is the minimum value the firm must maintain if the shareholders are to exercise their call option on the firm in 1 year?

A)$50,000.00
B)$48,449.61
C)$51,600.00
D)$66,279.07
E)$70,588.80

Question 71

Bruno's stock is currently selling for $31.74 a share but is expected to increase to either $32 or $37 a share over the next year.The risk-free rate is 3 percent.What is the current value of a 1-year call option with an exercise price of $35?

A)$)27
B)$)33
C)$)64
D)$)89
E)$)52

Question 72

Ed's Sheds has a $1,250 pure discount bond that comes due in 1 year.The risk-free rate of return is 3.1 percent.The firm's assets are expected to be worth either $1,100 or $1,500 in 1 year.Currently,these assets are worth $1,360.What is the current value of the firm's debt?

A)$1,287.48
B)$1,293.85
C)$1,212.52
D)$1,153.85
E)$1,176.83

Question 73

The Whistle Stop has a stock price of $17 a share.One-year options have a strike price of $20.The risk-free rate is 2.8 percent,the standard deviation is 29 percent,N(d₁)is 0.37492 and N(d₂)is 0.27131.What is the call price?

A)$1.18
B)$1.26
C)$)77
D)$1.37
E)$1.10

Question 74

A stock has a market value of $36.10 a share.The $35 call option is priced at $1.48.The intrinsic value of this option is ________,and the time value is ________.

A)$1.10;$.38
B)$1.10;$1.48
C)$0;$1.48
D)$0;$.38
E)$0;$1.10

Question 75

You wrote six put option contracts on Bakers Field stock with an exercise price of $30 and an option price of $2.20.The stock price was $31.20 a share on the option expiration date.Ignoring trading costs and taxes,what is your total net profit or loss on this investment?

A)−$1,320
B)$2,040
C)$1,320
D)$1,180
E)−$1,180

Question 76

British Imports has a stock price of $38.62 a share.The $35 put is priced at $.15.The intrinsic value of the put is ________,and the time value is ________.

A)$0;$1.65
B)$3.62;$.15
C)$0;$.15
D)$0;$3.62
E)$3.62;−$3.47

Question 77

A stock is currently priced at $53.80 a share.One year from now,the stock price is expected to be either $54 or $59 a share.The risk-free rate of return is 2 percent.What is the value of a 1-year call option with an exercise price of $55?

A)$)75
B)$)81
C)$)45
D)$)69
E)$)51

Question 78

The 3-month options on XYZ stock have a strike price of $35 while the stock price is $43.The risk-free rate is 3.15 percent,the standard deviation is 27 percent,N(d₁)is 0.95060 and N(d₂)is 0.93520.What is the call price?

A)$4.14
B)$4.72
C)$8.40
D)$6.56
E)$5.64

Question 79

Valley Foods has a stock price of $34.92 a share.The 3-month options have a strike price of $35.The risk-free rate is 4.2 percent,the standard deviation is 38 percent,N(d₁)is 0.55497 and N(d₂)is 0.47935.What is the call price?

A)$2.03
B)$2.78
C)$2.69
D)$2.11
E)$2.47

Question 80

The $17.50 put option on ALF stock is priced at $.75.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $18 a share?

A)−$50
B)−$25
C)$0
D)$25
E)$50