Question 1

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

Accepted Answer

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)   Is written on 100 shares of the underlying security while the European call covers 1,000 shares.
E)   Can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.F) None of the above
G) A) and C)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Selling a call option may give you the obligation to sell shares.

Accepted Answer

A) True 
 B)False

Question 4

The lower bound of a call option:

Accepted Answer

A)   Can be a negative value regardless of the stock or exercise prices.
B)   Can be a negative value but only when the exercise price exceeds the stock price.
C)   Can be a negative value but only when the stock price exceeds the exercise price.
D)   Must be greater than zero.
E)   Can be equal to zero.F) None of the above
G) A) and E)

Question 5

The intrinsic value of a call option is deﬁned as:

Accepted Answer

A)   max [S0 + E, 0]
B)   max [E - S0, 0]
C)   min [S0 - E, 0]
D)   max [S0 - E, 0]
E)   min [E - S0, 0]F) All of the above
G) A) and C)

Question 6

The value of an American call option decreases when the value of the underlying asset decreases.

Accepted Answer

A) True 
 B)False

Question 7

Wicker Importers has total assets of $2,860. These assets are expected to increase in value to either $2,900 or $3,200 by next year. The company has a pure discount bond outstanding with a
Face value of $3,000.This bond matures in one year. Currently, Treasury bills are yielding 5 percent.
What is the value of the equity in this ﬁrm?

Accepted Answer

A)   $65.40
B)   $133.33
C)   $140.00
D)   $190.48
E)   $200.00F) D) and E)
G) A) and D)

Question 8

You own ﬁve put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

Accepted Answer

A)   -$250
B)   -$50
C)   $0
D)   $50
E)   $250F) A) and E)
G) A) and B)

Question 9

Given that d1 = 1.50 in the Black-Scholes formula, the time to expiration of a call option is two months, the risk-free rate is 6% per year, and the standard deviation of returns on the shares
Underlying the call option is 20%. What is the value of d2 if the exercise price is $28 and the stock
Price is $31.23?

Accepted Answer

A)   1.42
B)   1.48
C)   1.50
D)   1.58E) B) and D)
F) A) and D)

Question 10

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a speciﬁed price is called:

Accepted Answer

A)   Either an American or a European option.
B)   An American call.
C)   An American put.
D)   A European put.
E)   A European call.F) B) and C)
G) C) and D)

Question 11

For the equity of a ﬁrm to be considered a call option on the ﬁrm's assets, the ﬁrm must:

Accepted Answer

A)   Be in default.
B)   Be leveraged.
C)   Pay dividends.
D)   Have a negative cash ﬂow from operations.
E)   Have a negative cash ﬂow from assets.F) A) and B)
G) A) and E)

Question 12

When warrants are exercised, the:

Accepted Answer

A)   Earnings per share decrease.
B)   Earnings per share remain constant.
C)   Total equity in a ﬁrm remains constant.
D)   Total equity in a ﬁrm decreases.
E)   Number of bonds outstanding increases.F) B) and E)
G) A) and C)

Question 13

Underlying stock price: 45.80  You want to purchase one October 45 call contract on Glaxo stock. The option contract will cost you _______________. (Ignore transactions costs.)

Accepted Answer

A)   $30.00
B)   $100.00
C)   $280.00
D)   $430.00
E)   $900.00F) A) and C)
G) A) and B)

Question 14

A local retail store allows you to return the merchandise you purchase and get your money back for up to 30 days after the purchase date. The store has, in effect, provided each shopper with
_______________ options.

Accepted Answer

A)   American call.
B)   European call.
C)   American put.
D)   European put.
E)   Convertible bond.F) B) and E)
G) C) and E)

Question 15

A put option you own is going to expire in one second. The current stock price is $25 and the strike price of your option is $30. Which of the following statements is NOT true?

Accepted Answer

A)   Your option has intrinsic value.
B)   Your option should be exercised or sold.
C)   You have the right to sell the stock for $30.
D)   Someone other than you stands to gain $5 per share when the option is exercised.
E)   Your option is in-the-money.F) B) and E)
G) A) and D)

Question 16

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction
Costs.

Accepted Answer

A)   An increase in the stock price will increase the value of your put and decrease the value of your call.
B)   Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C)   The time premium on both your put and call are less than the time premiums on equivalent June options.
D)   A decrease in the stock price will decrease the value of both of your options.
E)   You cannot proﬁt on your position as your proﬁts on one option will be offset by losses on the other option.F) A) and E)
G) A) and B)

Question 17

An increase in the time to expiration will increase the value of a call option.

Accepted Answer

A) True 
 B)False

Question 18

A convertible bond is similar to a bond with a put option.

Accepted Answer

A) True 
 B)False

Question 19

Neal owns a convertible bond that matures in four years. The bond has an 8 percent coupon and pays interest annually. The face value of the bond is $1,000 and the conversion price is $21.50.
Similar bonds have a market return of 7.5 percent. The current price of the stock is $21.82. What is
The conversion value of this bond?

Accepted Answer

A)   $989.00
B)   $1,000.00
C)   $1,003.12
D)   $1,008.16
E)   $1,014.88F) B) and C)
G) None of the above

Question 20

Today, you are buying a one-year call on one share of XYZ stock with a strike price of $35 along with a one-year risk-free asset which pays 5 percent interest. The cost of the call is $1.60 and the
Amount invested in the risk-free asset is $33.33. How much proﬁt will you earn if the stock has a
Market price of $37 one year from now?

Accepted Answer

A)   $2.07
B)   $2.11
C)   $2.16
D)   $2.29
E)   $2.31F) D) and E)
G) C) and E)

Exam 25: Option Valuation

Correct Answer
verified

A local retail store allows you to return the merchandise you purchase and get your money back for up to 30 days after the purchase date. The store has, in effect, provided each shopper with _______________ options.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

A put option you own is going to expire in one second. The current stock price is $25 and the strike price of your option is $30. Which of the following statements is NOT true?

Correct Answer
verified

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a speciﬁed price is called:

Correct Answer
verified

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction Costs.

Correct Answer
verified

Underlying stock price: 45.80 You want to purchase one October 45 call contract on Glaxo stock. The option contract will cost you _______________. (Ignore transactions costs.)

Correct Answer
verified

Selling a call option may give you the obligation to sell shares.

Correct Answer
verified

For the equity of a ﬁrm to be considered a call option on the ﬁrm's assets, the ﬁrm must:

Correct Answer
verified

The value of an American call option decreases when the value of the underlying asset decreases.

Correct Answer
verified

An increase in the time to expiration will increase the value of a call option.

Correct Answer
verified

The lower bound of a call option:

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

The intrinsic value of a call option is deﬁned as:

Correct Answer
verified

Correct Answer
verified

When warrants are exercised, the:

Correct Answer
verified

A convertible bond is similar to a bond with a put option.

Correct Answer
verified

You own ﬁve put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

Correct Answer
verified

Exam 25: Option Valuation

Correct AnswerverifiedShow Answer

A local retail store allows you to return the merchandise you purchase and get your money back for up to 30 days after the purchase date. The store has, in effect, provided each shopper with _______________ options.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A put option you own is going to expire in one second. The current stock price is $25 and the strike price of your option is $30. Which of the following statements is NOT true?

Correct AnswerverifiedShow Answer

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a speciﬁed price is called:

Correct AnswerverifiedShow Answer

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction Costs.

Correct AnswerverifiedShow Answer

Underlying stock price: 45.80 You want to purchase one October 45 call contract on Glaxo stock. The option contract will cost you _______________. (Ignore transactions costs.)

Correct AnswerverifiedShow Answer

Selling a call option may give you the obligation to sell shares.

Correct AnswerverifiedShow Answer

For the equity of a ﬁrm to be considered a call option on the ﬁrm's assets, the ﬁrm must:

Correct AnswerverifiedShow Answer

The value of an American call option decreases when the value of the underlying asset decreases.

Correct AnswerverifiedShow Answer

An increase in the time to expiration will increase the value of a call option.

Correct AnswerverifiedShow Answer

The lower bound of a call option:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The intrinsic value of a call option is deﬁned as:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When warrants are exercised, the:

Correct AnswerverifiedShow Answer

A convertible bond is similar to a bond with a put option.

Correct AnswerverifiedShow Answer

You own ﬁve put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified