Question 1

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

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Question 2

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

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Question 3

Investors who buy calls or puts have a cap on their possible losses from holding options.Specifically, they cannot lose more than the value of their premium.How does this differ for investors who sell options?

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Question 4

What options may be present in capital investment proposals?

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Question 5

How, in general, is value derived from options on real assets?

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Question 6

Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65.Also assume that the price of the middle call were the average of the other two calls.Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero.What can you deduce from this example about option pricing?

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Question 7

What is a callable bond and how is its value determined?

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Question 8

Circular file stock is selling for $50 a share.You see that call options on the stock with an exercise price of $40 are selling at $6.What should you do? What will happen to the option price as investors identify this opportunity?

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Question 9

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price, exercise price, interest rate, time to expiration, volatility of stock price.

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Question 10

For each of the following option and securities combinations show what the payoff would be when the option expires.Assume that each option has the same exercise price and expiration date.
a.Buy a call and invest the present value of the exercise price in a bank deposit.
b.Buy a share and a put option on the share.
c.Buy a share, buy a put option on the share, and sell a call option on the share.
d.Buy a call option and a put option on the share.

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Question 11

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

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Question 12

What is the payoff to buyers and sellers of call and put options?

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Question 13

Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10% nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70.Show that it is possible to replicate the stock payoff by borrowing and buying a call option.

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Question 14

What are the determinants of option values?

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Question 15

What options may be provided in financial securities?

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Question 16

Assume that a share of stock is currently selling for $80, that a call option can be purchased for an $8 premium and an exercise price of $80, and that a put option can be purchased for a $4 premium and an exercise price of $80.If the investor buys one share, one call, and one put option, what type of price movements will be desirable? Illustrate the investor's potential profits.

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Question 17

Why would bondholders be willing to pay more for bonds that contain warrants?

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Question 18

Circular File stock is selling for $25 a share.You see that call options on the stock with exercise price of $20 are selling at $3.What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with exercise price $30 are selling for $4.What should you do?

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Question 19

Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put.

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Question 20

What options may be provided in financial securities?

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Quiz 25: Conclusion

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

Investors who buy calls or puts have a cap on their possible losses from holding options.Specifically, they cannot lose more than the value of their premium.How does this differ for investors who sell options?

What options may be present in capital investment proposals?

How, in general, is value derived from options on real assets?

What is a callable bond and how is its value determined?

Circular file stock is selling for $50 a share.You see that call options on the stock with an exercise price of $40 are selling at $6.What should you do? What will happen to the option price as investors identify this opportunity?

Define and briefly explain the relationship between value of a call option and the following five factors: Stock price, exercise price, interest rate, time to expiration, volatility of stock price.

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

What is the payoff to buyers and sellers of call and put options?

What are the determinants of option values?

What options may be provided in financial securities?

Why would bondholders be willing to pay more for bonds that contain warrants?

Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put.

What options may be provided in financial securities?