Deck 17: Options and Corporate Finance

Question 1

The maximum value of a call option is equal to:

A)the strike price minus the initial cost of the option.
B)the exercise price plus the price of the underlying stock.
C)the strike price.
D)the book value of the underlying stock.
E)the market price of the underlying stock.

Answer 1

the market price of the underlying stock.

Question 2

A 40 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.

Answer 2

in the money.

Question 3

The value of an option if it were to immediately expire,that is,its lower pricing bound,is called the option's _____ value.

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

Answer 3

intrinsic

Question 4

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 5

The lower bound of a call option:

A)can be a negative value regardless of the stock or exercise prices.
B)can be a negative value but only when the stock price exceeds the exercise price.
C)can be a negative value but only when the exercise price exceeds the stock price.
D)can be equal to zero.
E)must be greater than zero.

Question 6

A _____ is a derivative security that gives 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 lower bound on a call's value is either 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 8

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 a 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 9

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 10

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

Question 11

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 12

Eduardo owns an option which 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 two weeks.Which of the following statements apply to this situation?
I.He must own a European call option.
II.He must own an American put option.
III.He should sell his option today if he feels the price of the stock will decline significantly over the next two weeks.
IV.He cannot profit today from the price increase in the stock.

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

Question 13

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:

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

Question 14

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 15

A _____ 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 16

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 17

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 18

The effect on an option's value of a small change in the value of the underlying asset is called the option:

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

Question 19

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.

Question 20

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 21

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.

Question 22

Given a binomial example,the value of a call can be determined as:

A)Stock price × Delta - Amount borrowed.
B)Delta × (Stock price - Amount borrowed).
C)Stock price × Delta + Exercise price.
D)Stock price - Amount borrowed × Delta.
E)(Exercise price - Stock price)× Delta.

Question 23

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 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

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 26

You own stock in a firm that has a pure discount loan due in six 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 27

Shareholders in a leveraged firm might wish to accept a negative net present value project if it:

A)lowers the risk level of the firm.
B)lowers the variance of the returns on the firm's assets.
C)increases the standard deviation of the returns on the firm's assets.
D)decreases the risk that a firm will default on its debt.
E)diversifies the cash flows of the firm.

Question 28

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 29

Consider a firm viewed in terms of put options.Given this view,which one of these statements is correct?

A)Stockholders sold a put on the firm to the bondholders.
B)Bondholders own the firm.
C)Bondholders and stockholders co-own the firm in equal shares.
D)Bondholders wrote a put on the firm to the stockholders.
E)The stockholders' position is equal to the value of the firm plus the value of the put.

Question 30

Which one of these combinations is a protection 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 31

For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:

A)equal to minus one.
B)between zero and one.
C)equal to zero.
D)between zero and minus one.
E)equal to one.

Question 32

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 33

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 34

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 35

Assume that 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 June 20 put and a June 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 36

Assuming all else equal,the value of an in-the-money call increases when:
I.the time to expiration increases.
II.the stock price increases.
III.the risk-free rate of return increases.
IV.the 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 37

Assume: N(d₂)= N(3.0155)= .9987.Given this assumption,a drawing from the standardized normal distribution has a ____ percent probability of being less than _____.

A)3.0155;.9987
B).13;3.0155
C)99.87;3.0155
D).0013;.9987
E).9987;3.0155

Question 38

In the Black-Scholes option pricing formula,N(d₁)is the probability that a standardized,normally distributed random variable is:

A)less than or equal to N(d₂).
B)less than one.
C)equal to one.
D)equal to d₁.
E)less than or equal to d₁.

Question 39

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 40

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 41

A stock has a market value of $34.50 a share.The $35 call option is priced at $1.10.The intrinsic value of this option is ____ and the time value is ______.

A)$0;$1.10
B)$1.10;$0
C)$.50;$.65
D)$.65;$.50
E)$1.60;-$.50

Question 42

You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30.The option expires today when the value of TJH stock is $42.90.Ignoring trading costs and taxes,what is your total profit or loss on your investment?

A)$500
B)$800
C)$960
D)$920
E)$940

Question 43

Jeanette just purchased 100 shares of HE stock along with a $30 put option contract on HE.The minimum value of her combined holdings is ______ and the maximum value is ______.

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

Question 44

You sold five put option contracts on Bakers Field stock with an exercise price of $27.50 and an option price of $1.06.The stock price was $28.20 a share on the option expiration date.Ignoring trading costs and taxes,what is your total net profit or loss on this investment?

A)-$530
B)-$180
C)$530
D)$180
E)$880

Question 45

Atlas stock is selling for $54.38 a share.A $52.50 call is valued at $2.50.What is the time value of ten call option contracts?

A)$18.80
B)$620.00
C)$188.00
D)$6.20
E)$62.00

Question 46

High Tower stock is selling for $23.16 a share,the $25 puts are priced at $2.05,and the $25 calls are priced at $.36.How much will you receive if you write thirty $25 put option contracts?

A)$1,080.00
B)$6,150.00
C)$108.00
D)$10.80
E)$61.50

Question 47

A 1-month $25 call option on BRU stock is priced at $3.22 while the 1-month $30 put option is priced at $2.05.Which one of these is the best estimate of the current price of one share of BRU stock?

A)$27.50
B)$28.00
C)$28.50
D)$26.50
E)$30.00

Question 48

European Imports has a stock price of $37.90 a share.The $37.50 put is priced at $2.75.The intrinsic value of the put is ____ and the time value is _____.

A)$0;$2.75
B)$2.75;$0
C)$.40;$2.35
D)$2.35;$.40
E)$2.75;$2.40

Question 49

You sold a $30 put contract on EDF stock at an option price of $1.30.The option was exercised when the stock price was $26.10 a share.What is your total net profit or loss?

A)-$140
B)-$260
C)$130
D)$260
E)$520

Question 50

You purchased two WXO 30 call option contracts at a quoted price of $.35.What is your net gain or loss on this investment if the price of WXO is $33.70 on the option expiration date?

A)-$810
B)-$405
C)$670
D)$540
E)$335

Question 51

The 6-month $35 options on Leeway Motors stock are priced at $.54 for the call and $3.60 for the put.The risk-free rate is .4 percent per month.What is the per share price of the underlying stock?

A)$32.79
B)$38.91
C)$37.23
D)$31.11
E)$34.14

Question 52

Robotic stock is selling for $81.68 a share.One $80 call contract is valued at $170 and one $80 put contract is valued at $110.What is the per share intrinsic value of the put?

A)$0
B)$1.10
C)$.30
D)$1.68
E)$.60

Question 53

The $22.50 put option on ALF stock is priced at $1.12.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $23.10 a share?

A)-$60
B)-$52
C)$0
D)$60
E)$52

Question 54

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 $20 and an option price of $1.65.You also purchase a 1-month put option on the stock with a strike price of $20 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 $15.40 on the day the options expire?

A)$365
B)$0
C)-$260
D)$200
E)$105

Question 55

You wrote six call option contracts on MNO stock with a strike price of $25 and an option price of $.15.What is your total net profit or loss on all transactions related to this investment if the price of MNO is $26.20 on the option expiration date? Ignore taxes and transaction costs.

A)-$345
B)-$630
C)-$810
D)$630
E)$810

Question 56

RTF stock is currently priced at $19.13 a share.The only options on this stock are the March $25 call option,which is priced at $.58,and the March $25 put which is priced at $5.99.Flo would like the option to purchase 300 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 300 put option contracts and receive $1,797
B)Sell 3 call option contracts and receive $174
C)Buy 300 call option contracts at a cost of $1.74
D)Buy 3 put option contracts at a cost of $17.97
E)Buy 3 call option contracts at a cost of $174

Question 57

Pure Aqua stock is selling for $36.60 a share.One $35 call is valued at $1.92 and one $35 put is valued at $.45.What is the value of five call option contracts?

A)$2.25
B)$9.60
C)$225.00
D)$960.00
E)$800.00

Question 58

British Imports has a stock price of $18.70 a share.The $20 put is priced at $1.65.The intrinsic value of the put is ____ and the time value is _____.

A)$0;$1.65
B)$1.65;$0
C)$1.30;$.35
D)$.35;$1.30
E)$2.95;-$1.65

Question 59

The 1-year $20 options on Water Kingdom stock are priced at $1.55 for the call and $.45 for the put.The annual risk-free rate is 2.5 percent.What is the per share price of the underlying stock?

A)$23.59
B)$20.61
C)$19.40
D)$31.33
E)$18.41

Question 60

Rita owns 12 put option contracts on Farmington stock with an exercise price of $32.50.What is the total intrinsic value of these contracts if the stock is currently selling for $31.98 a share?

A)-$624
B)-$312
C)$0
D)$312
E)$624

Question 61

You own a call option on NICo stock that expires in one year.The exercise price is $35.The current price of the stock is $37.40 and the risk-free rate of return is 4.25 percent.Assume the option will finish in the money.What is the current value of the call option?

A)$2.40
B)$3.83
C)$3.50
D)$2.31
E)$2.50

Question 62

A stock is selling for $48 a share.The 6-month options have an exercise price of $50.The risk-free rate is 3.5 percent,the standard deviation is 32 percent,and the d₁ value is .01007.What is the value of d₂?

A)-.13130
B)-.21620
C)-.24601
D)-.17069
E)-.02307

Question 63

The Bakery's assets are currently valued at $2,150.These assets are expected to be worth either $1,900 or $2,100 one year from now.The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year.The risk-free rate is 5 percent.What is the value of the equity in this firm?

A)$170.24
B)$231.42
C)$385.71
D)$405.00
E)$714.29

Question 64

Valley Foods has a stock price of $37 a share.The 9-month options have a strike price of $35.The risk-free rate is 3.5 percent,the standard deviation is 24 percent,N(d₁)is .69061 and N(d₂)is .61399.
What is the call price?

A)$2.03
B)$4.62
C)$3.69
D)$4.08
E)$3.47

Question 65

The delta of a call option on a firm's assets is .316.This means that a 409,000 project will increase the value of equity by:

A)$129,244
B)$113,406
C)$138,987
D)$142,215
E)$121,005

Question 66

The Whistle Stop has a stock price of $23 a share.One-year options have a strike price of $22.50.The risk-free rate is 4.2 percent,the standard deviation is 31 percent,N(d₁)is .64109 and N(d₂)is .52049.
What is the call price?

A)$3.40
B)$4.06
C)$3.77
D)$3.37
E)$3.52

Question 67

Wilt's has a stock price of $54 a share.The 3-month options have a strike price of $55.The risk-free rate is 3.6 percent,the standard deviation is 26 percent,N(d₁)is .49724 and N(d₂)is .44555.
What is the call price?

A)$2.68
B)$2.57
C)$2.73
D)$2.91
E)$2.46

Question 68

OK Corral stock is selling for $29 a share.A 4-month $30 call is priced at $1.50.Risk-free assets are currently returning .25 percent per month.What is the price of the 4-month $30 put?

A)$2.20
B)$2.02
C)$.73
D)$3.80
E)$3.28

Question 69

Benny's is reviewing a $384,000 project that is expected to increase the firm's equity by $128,400.What is the project's delta?

A).2289
B).3344
C).6948
D).9903
E).2701

Question 70

Bruno's stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year.The risk-free rate is 4 percent.What is the current value of a 1-year call option with an exercise price of $30?

A)$.58
B)$1.26
C)$.94
D)$.89
E)$1.32

Question 71

A stock is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the value of a 1-year call option with an exercise price of $55?

A)$.39
B)$.41
C)$.45
D)$.48
E)$.51

Question 72

Hilltop stock has a current market price of $56.80 a share.The 1-year $55 call is priced at $2.75 while the 1-year $55 put is priced at $.30.What is the risk-free rate of return?

A)1.20%
B).87%
C)1.48%
D).72%
E)1.39%

Question 73

A stock is priced at $26.50 and the risk-free rate of return is 3.5 percent annually.Assume a 1-year $20 call will finish in the money.What is the current value of the call option?

A)$6.25
B)$6.50
C)$6.76
D)$7.12
E)$7.18

Question 74

IOU stock is selling for $39.40 a share.The 6-month $40 call costs $1.20.Risk-free assets are currently returning .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 75

A stock is selling for $43.90 a share while the annual risk-free rate is 4.5 percent.What is the current value of a 1-year call option on this stock if the exercise price is $37.50 and you assume the option will finish in the money?

A)$6.12
B)$6.40
C)$6.69
D)$7.67
E)$8.01

Question 76

Assume the delta of a call option on a firm's assets is .456.This means that a $218,000 project will increase the value of equity by:

A)$317,408
B)$149,725
C)$99,408
D)$310,790
E)$538,244

Question 77

Ed's Sheds has a $1,200 pure discount bond that comes due in one year.The risk-free rate of return is 4 percent.The firm's assets are expected to be worth either $900 or $1,400 in one year.Currently,these assets are worth $1,100.What is the current value of the firm's debt?

A)$87.48
B)$93.85
C)$1,012.52
D)$1,153.85
E)$1,006.15

Question 78

The 6-month options on XYZ stock have a strike price of $40 while the stock price is $39.The risk-free rate is 3.75 percent,the standard deviation is 27 percent,N(d₁)is .52434 and N(d₂)is .44834.
What is the call price?

A)$2.44
B)$2.18
C)$2.85
D)$2.56
E)$2.64

Question 79

High Mountain has a stock price of $19 a share.The 3-month options have a strike price of $15.The risk-free rate is 2.5 percent and the standard deviation of returns is 17 percent.The value of d₁ is 2.89707.What is the value of d₂ as it is used in the Black-Scholes option pricing model?

A)2.69091
B)2.93048
C)2.67176
D)3.10323
E)2.81207

Question 80

Katie D's has total assets valued at $1,950.These assets are expected to increase in value to either $1,800 or $2,400 by next year.One year from now,the company must repay a $2,000 pure discount bond.The risk-free rate is 6 percent.What is the current value of the firm's debt?

A)$1,616.98
B)$1,782.08
C)$1,830.50
D)$1,886.79
E)$1,950.00