Deck 25: Options

Question 1

The value of a convertible bond is less than the value of a straight bond with similar coupon and maturity.

Answer 1

False

Question 2

The floor of a convertible bond will be the value of the underlying bond.

Answer 2

True

Question 3

At expiration a call option will have no value if the stock price is less than exercise price.

Answer 3

True

Question 4

Warrants are call options on a company's stock issued by an organized stock exchange.

Question 5

When the stock price is very high compared to the exercise price,the call option premium approximates the difference between the stock price and strike price.

Question 6

As a stock's market price increases,the value of its call option will increase also.

Question 7

The holder of a convertible bond is required to convert the bond into stock at maturity.

Question 8

The value of a call option increases as the strike price increases.

Question 9

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Question 10

The seller of a put option is betting that the market value of the stock will decrease.

Question 11

Stock price volatility is beneficial to option holders.

Question 12

The value of both call and put options increase as the variability of the stock price increases.

Question 13

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

Question 14

The longer the time until expiration of a call option,the greater the value of the option.

Question 15

The buyer of a call option has the obligation to buy shares at the strike price.

Question 16

At expiration a put option will have no value if the stock price is greater than the exercise price.

Question 17

Convertible bonds give the investor the option to buy the firm's stock in exchange for the value of the underlying bond.

Question 18

Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.

Question 19

A protective put is a costless way of eliminating the downside risk if holding stock.

Question 20

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

Question 21

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?

A) $46
B) $50
C) $52
D) $54

Question 22

What is the option buyer's total profit or loss per share if a call option is purchased for a $5 premium,has a $50 exercise price,and the stock is valued at $53 at expiration?

A) ($5)
B) ($2)
C) $3
D) $8

Question 23

Which is the best definition of a put option?

A) The right to buy an asset at a fixed price during a particular time period.
B) The right to sell an asset at a fixed price during a particular time period.
C) A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time.
D) The act of buying or selling the underlying asset via the option contract.

Question 24

It has been determined that 0.5 shares of stock should be purchased with borrowed funds to replicate the payoff to one call option.What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

A) $40
B) $50
C) $60
D) $70

Question 25

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

A) ($14)
B) ($10)
C) $10
D) $18

Question 26

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

A) ($20)
B) 0
C) $10
D) $20

Question 27

What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?

A) $90 per share profit
B) $10 per share profit
C) $0 per share profit (break-even)
D) Unlimited losses

Question 28

Which is the best definition of a call option?

A) The right to buy an asset at a fixed price during a particular time period.
B) The right to sell an asset at a fixed price during a particular time period.
C) A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time.
D) The act of buying or selling the underlying asset via the option contract.

Question 29

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

A) $.50 shares
B) $.75 shares
C) $.63 shares
D) $1.25 shares

Question 30

You are currently holding a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option will be:

A) ($20).
B) $0.
C) $20.
D) $60.

Question 31

What is the minimum value of the call option on a convertible bond with a conversion ratio of 30 if the bond offers a 9% coupon,has 10 years until maturity and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

A) $0
B) $5
C) $50
D) $65

Question 32

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit per share if the option is exercised tomorrow?

A) ($16)
B) ($8)
C) $8
D) $16

Question 33

Calculate the return on exercising a put option that was purchased for $10,with an exercise price of $85.The stock price at expiration is $81.

A) (60%)
B) 60%
C) 30%
D) (30%)

Question 34

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit per share at tomorrow's expiration?

A) ($3)
B) $3
C) $7
D) $10

Question 35

You paid $5 a call option on a stock with an exercise price of $80.If the current stock price is $60,your net proceeds by exercising this option and selling the stock will be:

A) ($25).
B) $0.
C) $20.
D) $60.

Question 36

Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

Question 37

What is the profit per share for an investor who has purchased a share of stock and two put options with an exercise price of $40,given that the purchase price of the stock was $42,each put cost $2 per share,and the stock was valued at $30 at expiration?

A) ($16)
B) ($6)
C) ($4)
D) $4

Question 38

Three months back you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92,what is your return on investment?

A) 200 percent
B) 150 percent
C) 100 percent
D) 50 percent

Question 39

What is the value of a convertible bond with a conversion ratio of 25,face value of $1,000,coupon of 10% and yield of 10 percent? Common stock of this firm is currently selling at $35.

A) $875
B) $1,000
C) $1,125
D) $1,875

Question 40

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60,what is the value of the callable bond?

A) $940
B) $970
C) $1,000
D) $1,060

Question 41

If a convertible bond can be thought of as a straight bond with a call option,then the call is owned by the ___________ and the strike price is the ___________.

A) Debt issuer; stock price
B) Debt issuer; straight bond value
C) Bond investor; stock price
D) Bond investor; straight bond value

Question 42

Investors who hold warrants essentially have a:

A) put option on the firm's bonds.
B) put option on the firm's equity.
C) call option on the firm's bonds.
D) call option on the firm's equity.

Question 43

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

A) less than $15.
B) greater than $15.
C) equal to $15.
D) zero.

Question 44

If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share,then the:

A) bond should trade for $900.
B) bond should trade for $1,000.
C) bond should trade for $1,100.
D) firm will have already converted the bond.

Question 45

Which of the following option traders receive,rather than pay,a premium?

A) Option sellers
B) Option buyers
C) Both option sellers and buyers
D) Neither buyers nor sellers receive premiums

Question 46

An investor can create a straddle position by doing the following:

A) buy a stock and write a call option.
B) buy a stock and buy a call option.
C) buy a stock and buy a put option.
D) buy a call option and a put option with the same exercise price.

Question 47

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share,then:

A) the bond will be converted immediately.
B) the bond is violating its "price floor".
C) conversion now would give the investor a profit of $900.
D) the conversion value of the bond is $900.

Question 48

Which of the following is correct for the owner of a September put,valued at $20,on CBA Corp.with a strike price of $80? CBA currently trades at $67.

A) The option will continue to gain value until its September expiration.
B) The owner profits $13 per share by exercising now.
C) Further decreases in CBA stock price will be translated directly into additional option value.
D) $20 is the maximum value for this option.

Question 49

Which is the best definition of a warrant?

A) The right to buy an asset at a fixed price during a particular time period.
B) The right to sell an asset at a fixed price during a particular time period.
C) A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time.
D) The act of buying or selling the underlying asset via the option contract.

Question 50

Which of the following changes will decrease the value of a call option?

A) An increase in stock price.
B) An increase in strike price.
C) An increase in stock price volatility.
D) An increase in interest rates.

Question 51

Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?

A) September put; $65 exercise price
B) September put; $75 exercise price
C) December put; $65 exercise price
D) December put; $75 exercise price

Question 52

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

A) Buyer of a call option with exercise price of $65.
B) Buyer of a put option with exercise price of $65.
C) Buyer of a call option with exercise price of $80.
D) Buyer of a put option with exercise price of $85.

Question 53

Which combination of positions will tend to protect the owner from downside risk?

A) Buy the stock and buy a call option.
B) Sell the stock and buy a call option.
C) Buy the stock and buy a put option.
D) Buy the stock and sell a put option.

Question 54

The option to abandon a project investing in real assets can be considered to have a strike price equal to the:

A) historical cost of the asset.
B) market value of the asset at abandonment.
C) forgone revenues anticipated from the project.
D) forgone interest on the bonds used to finance the real assets.

Question 55

If you feel strongly that a stock price will move,but are unsure of the direction,you could buy the stock and:

A) buy both a put and a call.
B) sell both a put and a call.
C) buy a put and sell a call.
D) buy two puts.

Question 56

Firms spend an increasing amount of time evaluating real options,which are:

A) options on real assets such as an option to abandon.
B) call and put options traded on organized exchanges.
C) call options such as warrants and convertible bonds.
D) put options such as held by shareholders of a firm with financial leverage.

Question 57

The value of a call option increases as the time to expiration increases because:

A) the exercise price continually decreases.
B) opportunity increases to surpass exercise price.
C) dividends accumulate while waiting to be paid.
D) the option can be repeatedly exercised.

Question 58

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

A) greater than $75, but less than $78.
B) greater than $75, but less than $80.
C) greater than $72, but less than $75.
D) less than $67, or greater than $83.

Question 59

A decrease in which of the following terms will cause an increase in the call value of an option?

A) Interest rates
B) Time to maturity
C) Exercise price
D) Volatility of the stock

Question 60

Why is the value of a call option said to increase as the interest rate increases?

A) The stock seller must pay the call owner more interest.
B) The present value of the strike price is reduced.
C) As interest rates increase, stock prices increase.
D) Interest rate increases reduce the option premium.

Question 61

An investor who is buying a put option is expecting:

A) stock prices to go up.
B) stock prices to go down.
C) interest rates to go up.
D) interest rates to go down.

Question 62

Adding warrants as a 'sweetener' to bonds will:

A) reduce the value of the bond.
B) increase the coupon rate of the bond.
C) increase the value of the bond.
D) make the bond more risky.

Question 63

The conversion ratio for a convertible bond equals the:

A) ratio of bond value to stock price at conversion.
B) number of bonds necessary to convert into one share of stock.
C) number of shares of stock that can be exchanged for one bond.
D) floor value beneath which the bond price cannot fall.

Question 64

Which of the following call options would command the higher premium,other things equal?

A) October 2015 expiration, $45 strike price
B) December 2015 expiration, $40 strike price
C) March 2016 expiration, $45 strike price
D) June 2016 expiration, $40 strike price

Question 65

Option buyers can have a(n)__________ of exercising their options.Options sellers can have a(n)__________ of exercising their options.

A) Obligation; obligation
B) Obligation; right
C) Right; right
D) Right; obligation

Question 66

Stocks that have more volatile price changes have more valuable call options because call holders:

A) capture upside potential without downside risk.
B) realize that volatility decreases the present value of the exercise price.
C) have too little variability in the exercise price.
D) have transferred all risk to put holders.

Question 67

The payoffs from investing in options are designed so that:

A) both buyers and sellers can profit.
B) the seller's (buyer's) gain is the buyer's (seller's) loss.
C) roughly 20% of sellers and 50% of buyers profit.
D) few buyers or sellers profit; they buy "insurance".

Question 68

How does the price of a put option respond to an interest rate increase?

A) Increases
B) Decreases
C) Remains the same
D) Goes to zero

Question 69

It is May 19^th and you own a June,European call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?

A) Exercise the option now and take the profits.
B) Buy more options on ABC Corp.
C) Sell your ABC stock before its price declines.
D) Sit and wait until the June expiration.

Question 70

The value of a callable bond equals the value of a straight bond:

A) plus the value of the bondholder's call option.
B) minus the value of the bondholder's call option.
C) plus the value of the issuer's call option.
D) minus the value of the issuer's call option.

Question 71

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

A) The firm is in poor financial health.
B) Interest rates have risen substantially since the bond was issued.
C) Interest rates have fallen substantially since the bond was issued.
D) The call option is ready to expire.

Question 72

A writer of a call option expects the stock price to:

A) decrease.
B) increase.
C) remain unchanged.
D) cash dividends quarterly.

Question 73

How does the price of a put option respond to a stock price increase?

A) Increases
B) Decreases
C) Remains the same
D) Goes to zero

Question 74

The major difference between options on real assets and options on financial assets is that options on:

A) financial assets are costly.
B) financial assets have a higher probability of positive payoff.
C) real assets are implicit, rather than explicit.
D) real assets are not influenced by price volatility.

Question 75

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration,then the option:

A) expires worthless.
B) will not be exercised.
C) is worth at least $7 per share.
D) cost too much initially.

Question 76

When the stock price has risen above the exercise price,the value of a call option is equal to the stock price:

A) less the value of the dividend.
B) less the value of the option.
C) less the present value of the exercise price.
D) less the exercise price.

Question 77

How does the price of a put option respond to an exercise price increase?

A) Increases
B) Decreases
C) Remains the same
D) Goes to zero

Question 78

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

A) put option.
B) call option.
C) option to expand.
D) it is not an option.

Question 79

Corporations that attach warrants to their bonds are hoping to:

A) sell equity without paying flotation costs.
B) convert the bonds into stock at a later date.
C) reduce the cost of debt by increasing bond prices.
D) increase the price of their shares.

Question 80

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

A) Option holders pay no income taxes.
B) Shareholders do not have capped (restricted) profits.
C) Option holders do not receive dividends.
D) Shareholders cannot sustain losses.