Deck 24: Present Value of 1 at Compound Interest

Question 1

Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction costs and dividends. By how much must the share price rise for Nico to break even on the option transaction?

Answer 1

To break even on the option transaction, the share price would have to rise by $5 to $27 per share.

Question 2

A _ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. are purchased if the stock price is expected to fall.

A) put; call; Calls
B) call; put; Puts
C) put; call; Puts
D) call; put; Calls

Answer 2

B

Question 3

Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction costs and dividends. What will Nico's profit be on the share transaction if he decides to buy the stock and its price does increase to $30 per share and he sells?

Answer 3

He will earn a profit of $8 per share or $800 total.

Question 4

A firm can raise capital by issuing securities such as convertibles and warrants but a firm has nothing to do with the creation of options to raise capital.

Question 5

A security that is neither debt nor equity but derives its value from an underlying asset that is often another security is called

A) derivative security.
B) none of the above.
C) hybrid security.
D) convertible security.

Question 6

All of the following are true of calls and puts EXCEPT

A) options are issued by businesses.
B) the financial manager of a company has very little need to deal with options.
C) the presence of options trading in the firm's stock could, by increasing trading activity, stabilise the firm's share price in the marketplace.
D) options are not a source of funding to the corporation.

Question 7

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n)

A) hybrid security.
B) operating lease.
C) option.
D) derivative security.

Question 8

All of the following are true of calls and puts EXCEPT

A) the presence of options trading in the firm's stock could, by increasing trading activity, stabilise the firm's share price in the marketplace.
B) the financial manager of a company has very little need to deal with options.
C) options are issued by businesses.
D) options are not a source of funding to the corporation.

Question 9

A call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

Question 10

Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction costs and dividends. How much will Nico earn on the option transaction if he purchases the option and the underlying share price rises to $30?

Question 11

An investor is considering buying 500 shares of ABC Company at £32 per share. Analysts agree that the firm's share price may increase to £45 per share in the next 4 months. As an alternative, the investor could purchase a 120- day call option at a strike price of £30 for £5,000. At which share price would the investor break even?

A) $45.
B) $42.
C) $35.
D) $40.

Question 12

The Over- the- Counter (OTC) exchange is not an organization but an intangible market for trading securities which are not listed by the organized exchanges.

Question 13

Options provide the holder with the right to purchase or sell specified assets at a stated price on or before a set expiration date.

Question 14

For puts and calls, the exercise price is called

A) the market price.
B) the expected value.
C) the strike price.
D) the option price.

Question 15

Which of the following statements about put and call options is false?

A) They are a form of deferred equity financing by the firm.
B) They provide the buyer with an opportunity to earn larger returns than simply buying or selling ordinary shares.
C) They can be used to lock in a gain or prevent a loss on a shareholding.
D) They are traded on organized exchanges.

Question 16

The option buyer who expects a stock price to decline will purchase a put option.

Question 17

The strike price is the price at which the holder of a call option can buy a specified number of shares at any time prior to the option's expiration date.

Question 18

In the OTC market, the prices at which securities are traded result from both competitive bids and negotiation.

Question 19

The option buyer who expects a stock price to decline will purchase

A) a put.
B) a convertible bond.
C) a warrant.
D) a call.

Question 20

For puts and calls, the exercise price is called

A) the expected value.
B) the option price.
C) the market price.
D) the strike price.

Question 21

Unlike the organized exchanges, the OTC makes a market in both outstanding securities and new public issues, making it both a secondary and a primary market.

Question 22

A firm can raise capital by issuing securities such as convertibles, warrants, calls and puts.

Question 23

An option is a security that is neither debt nor equity but derives its value from an underlying asset that is often another security.

Question 24

A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.

Question 25

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

Question 26

Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall

Question 27

Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

Question 28

A derivative security is neither debt nor equity but instead derives its value from an underlying asset.