Question 1

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

Accepted Answer

A)   $12,203
B)   $12,245
C)   $12,287
D)   $12,241
E)   $12,367F) B) and E)
G) A) and B)

Question 2

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Accepted Answer

A)   $8.50 million
B)   $9.98 million
C)   $12.00 million
D)   $19.42 million
E)   $23.84 millionF) A) and E)
G) None of the above

Question 3

Which one of the following best defines the primary purpose of a protective put?

Accepted Answer

A)   ensure a maximum purchase price in the future
B)   offset an equivalent call option
C)   limit the downside risk of asset ownership
D)   lock in a risk-free rate of return on a financial asset
E)   increase the upside potential return on an investmentF) C) and D)
G) A) and E)

Question 4

Given the (1) exercise price E, (2) time to maturity T,and (3) European put-call parity,the present value of E plus the value of the call option is equal to the:

Accepted Answer

A)   current market value of the stock.
B)   present value of the stock minus the value of the put.
C)   value of the put minus the market value of the stock.
D)   value of a risk-free asset.
E)   stock value plus the put value.F) None of the above
G) A) and D)

Question 5

Under European put-call parity,the present value of the strike price is equivalent to:

Accepted Answer

A)   the current value of the stock minus the call premium.
B)   the market value of the stock plus the put premium.
C)   the present value of a government coupon bond with a face value equal to the strike price.
D)   a U.S.Treasury bill with a face value equal to the strike price.
E)   a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.F) A) and B)
G) A) and C)

Question 6

The current market value of the assets of Smethwell,Inc.is $54 million,with a standard deviation of 16 percent per year.The firm has zero-coupon bonds outstanding with a total face value of $40 million.These bonds mature in 2 years.The risk-free rate is 4 percent per year compounded continuously.What is the value of d1?

Accepted Answer

A)   1.32
B)   1.48
C)   1.67
D)   1.79
E)   2.06F) All of the above
G) C) and D)

Question 7

Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?

Accepted Answer

A)   0.87 percent
B)   1.11 percent
C)   1.38 percent
D)   1.56 percent
E)   2.02 percentF) A) and D)
G) D) and E)

Question 8

To compute the value of a put using the Black-Scholes option pricing model,you:

Accepted Answer

A)   first have to apply the put-call parity relationship.
B)   first have to compute the value of the put as if it is a call.
C)   compute the value of an equivalent call and then subtract that value from one.
D)   compute the value of an equivalent call and then subtract that value from the market price of the stock.
E)   compute the value of an equivalent call and then multiply that value by e-RT.F) C) and D)
G) A) and C)

Question 9

Theta measures an option's:

Accepted Answer

A)   intrinsic value.
B)   volatility.
C)   rate of time decay.
D)   sensitivity to changes in the value of the underlying asset.
E)   sensitivity to risk-free rate changes.F) A) and C)
G) A) and B)

Question 10

Pure financial mergers:

Accepted Answer

A)   are beneficial to stockholders.
B)   are beneficial to both stockholders and bondholders.
C)   are detrimental to stockholders.
D)   add value to both the total assets and the total equity of a firm.
E)   reduce both the total assets and the total equity of a firm.F) A) and C)
G) B) and D)

Question 11

Put-call parity is defined as the relationship between which of the following variables?
I.risk-free asset
II.underlying stock price
III.call option
IV.put option

Accepted Answer

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

Question 12

Which one of the following statements is correct?

Accepted Answer

A)   The price of an American put is equal to the stock price minus the exercise price.
B)   The value of a European call is greater than the value of a comparable American call.
C)   The value of a put is equal to one minus the value of an equivalent call.
D)   The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price.
E)   The value of an American put will equal or exceed the value of a comparable European put.F) A) and D)
G) A) and C)

Question 13

What is the value of a 6-month put with a strike price of $27.25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)   $4.71
B)   $4.88
C)   $5.24
D)   $5.64
E)   $6.62F) B) and D)
G) C) and E)

Question 14

Today,you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46.What is the most you can lose on these purchases over the next year?

Accepted Answer

A)   -$1.85
B)   -$0.31
C)   $0
D)   $0.42
E)   $1.54F) A) and C)
G) None of the above B

Question 15

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Accepted Answer

A)   $6.67
B)   $7.02
C)   $7.34
D)   $7.71
E)   $7.80F) A) and B)
G) A) and E)

Question 16

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Accepted Answer

A)   American call
B)   European call
C)   American put
D)   European put
E)   either an American or a European putF) A) and B)
G) A) and D) C

Question 17

The value of a call option delta is best defined as:

Accepted Answer

A)   between zero and one.
B)   less than zero.
C)   greater than zero.
D)   greater than or equal to zero.
E)   greater than one.F) B) and E)
G) B) and C) A

Question 18

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 E)
G) All of the above

Question 19

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Accepted Answer

The answer of Identify the five variables that affect the...

Question 20

Which of the following statements are correct?
I.As the standard deviation of the returns on a stock increase,the value of a put option increases.
II.The value of a call option decreases as the time to expiration increases.
III.A decrease in the risk-free rate increases the value of a put option.
IV.Increasing the strike price increases the value of a put option.

Accepted Answer

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

Exam 25: Option Valuation

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

Correct Answer
verified

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Correct Answer
verified

Which one of the following best defines the primary purpose of a protective put?

Correct Answer
verified

Given the (1) exercise price E, (2) time to maturity T,and (3) European put-call parity,the present value of E plus the value of the call option is equal to the:

Correct Answer
verified

Under European put-call parity,the present value of the strike price is equivalent to:

Correct Answer
verified

Correct Answer
verified

Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?

Correct Answer
verified

To compute the value of a put using the Black-Scholes option pricing model,you:

Correct Answer
verified

Theta measures an option's:

Correct Answer
verified

Pure financial mergers:

Correct Answer
verified

Put-call parity is defined as the relationship between which of the following variables? I.risk-free asset II.underlying stock price III.call option IV.put option

Correct Answer
verified

Which one of the following statements is correct?

Correct Answer
verified

What is the value of a 6-month put with a strike price of $27.25 given the Black-Scholes option pricing model and the following information?

Correct Answer
verified

Correct Answer
verified
B

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Correct Answer
verified

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Correct Answer
verified
C

The value of a call option delta is best defined as:

Correct Answer
verified
A

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

Correct Answer
verified

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Correct Answer
verified

Correct Answer
verified

Exam 25: Option Valuation

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.How much will he have in his account if he leaves his money invested for 5 years?

Correct AnswerverifiedShow Answer

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Correct AnswerverifiedShow Answer

Which one of the following best defines the primary purpose of a protective put?

Correct AnswerverifiedShow Answer

Given the (1) exercise price E, (2) time to maturity T,and (3) European put-call parity,the present value of E plus the value of the call option is equal to the:

Correct AnswerverifiedShow Answer

Under European put-call parity,the present value of the strike price is equivalent to:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?

Correct AnswerverifiedShow Answer

To compute the value of a put using the Black-Scholes option pricing model,you:

Correct AnswerverifiedShow Answer

Theta measures an option's:

Correct AnswerverifiedShow Answer

Pure financial mergers:

Correct AnswerverifiedShow Answer

Put-call parity is defined as the relationship between which of the following variables? I.risk-free asset II.underlying stock price III.call option IV.put option

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

What is the value of a 6-month put with a strike price of $27.25 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?

Correct AnswerverifiedShow Answer

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Correct AnswerverifiedC

The value of a call option delta is best defined as:

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Correct AnswerverifiedShow Answer

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
B

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified