Question 1

The lower bound on a call's value is either the:

Accepted Answer

The lower bound on a call's value is the intrinsic value, which is the difference between the stock price and the exercise price (also known as the strike price). If the stock price is lower than the exercise price, the intrinsic value is zero. Therefore, the lower bound is the greater between zero and the difference between stock price and exercise price, which is option B.

Question 2

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:

Accepted Answer

A positive net present value project increases the value of a firm's assets, which also increases the value of a call option on those assets. The delta of a call option measures the sensitivity of the option price to changes in the underlying asset price. A delta of one means that the option price will increase by the same amount as the underlying asset price. Therefore, if the delta of the call option on the firm's assets is equal to one, the equity in the firm will increase the most.

Question 3

Which of the following statements is true?

Accepted Answer

American options may be exercised anytime up to expiration, while European options may only be exercised at expiration. The other answer choices contain incorrect information.

Question 4

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.

Accepted Answer

Paying off debt reduces the firm's liabilities, effectively increasing the equity holders' claim on the firm's assets. This is akin to exercising an in-the-money call option, where the holder opts to buy an asset at the strike price, benefiting from the asset's value being higher than the strike price.

Question 5

Which of the following statements are correct concerning option values?
I. The value of a 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 a put increases as the price of the underlying stock increases.
IV. The value of a put decreases as the exercise price increases.

Accepted Answer

The answer of Which of the following statements are correct...

Question 6

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 ______

Accepted Answer

Stockholders in a firm with a pure discount loan have a call option on the assets of the firm with a strike price equal to the face value of the loan. In this case, the face value of the loan is $50,000, so stockholders own a call option with a strike price of $50,000. The value of the underlying assets is $62,000, but this information is not relevant to the type of option owned by shareholders. Therefore, the correct answer is (E) call; $50,000.

Question 7

If a call has a positive intrinsic value at expiration the call is said to be:

Accepted Answer

A call is said to be "in the money" at expiration if its intrinsic value is positive. This means the stock price is above the strike price for a regular call option, making it profitable for the holder to exercise the option and buy the stock at the lower strike price.

Question 8

The value of a 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.

Accepted Answer

The value of a call option increases with longer time to expiration, higher stock prices, higher risk-free rates, and greater volatility of the underlying stock.

Question 9

The lower bound of a call option:

Accepted Answer

The lower bound of a call option is the maximum of zero or the difference between the stock price and the exercise price, so it can be zero but not negative.

Question 10

Which one of the following will cause the value of a call to decrease?

Accepted Answer

Lowering the risk level of the underlying security decreases the potential for large price movements, reducing the call option's value.

Question 11

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

The time premiums on options generally decrease as the expiration date approaches, so equivalent options with a later expiration date (June) will typically have higher time premiums than those with an earlier expiration date (May).

Question 12

A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36. The put is:

Accepted Answer

A put option is "out of the money" when the exercise price is below the current stock price. Since the exercise price is $35 and the stock price is $36, the put option is out of the money.

Question 13

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

Accepted Answer

In the Black-Scholes option pricing formula, $N(\cdot)$ represents the cumulative distribution function (CDF) of a standard normal distribution. Therefore, $N(d₁)$ represents the probability that a standardized, normally distributed random variable is less than or equal to $d₁$.

Question 14

The intrinsic value of a call is: I. the value of the call if it were about to expire.
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.

Accepted Answer

The intrinsic value of a call is the value if it were about to expire (I) and is equal to the lower bound of a call's value (II). If the call is out of the money, its intrinsic value is zero (IV).

Question 15

The intrinsic value of a put is equal to the:

Accepted Answer

The intrinsic value of a put option is calculated as the greater of the strike price minus the stock price or zero. This represents the value the put option would have if it were exercised immediately. If the stock price is below the strike price, the put has intrinsic value; if the stock price is above the strike price, the intrinsic value is zero, as the option would not be exercised.

Question 16

The owner of a call option has the:

Accepted Answer

The owner of a call option has the right but not the obligation to buy a stock at a specified price on a specified date.

Question 17

You own both a May 20 call and a May 20 put. If the call finishes in the money,then the put will:

Accepted Answer

If the call finishes in the money, it means the stock price has gone up and the put option will be out of the money as it gives the holder the right to sell the stock at a lower price than the current price. Therefore, the put option will finish out of the money.

Question 18

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

Accepted Answer

Shareholders in a leveraged firm might accept a negative NPV project if it increases the standard deviation of returns, as this can increase the value of their equity by shifting more risk to debt holders.

Question 19

The maximum value of a call option is equal to:

Accepted Answer

The maximum value of a call option is equal to the price of the underlying stock, as the option gives the right to buy the stock at the strike price, and theoretically, the stock price can rise indefinitely.

Question 20

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

Accepted Answer

To compute the value of a put using the Black-Scholes option pricing model, you first have to compute the value of the put as if it is a call. This is because the Black-Scholes model was originally developed for pricing call options and can be adapted to value puts by using the put-call parity relationship.

Quiz 22: Options and Corporate Finance

The lower bound on a call's value is either the:

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:

Which of the following statements is true?

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.

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 __

If a call has a positive intrinsic value at expiration the call is said to be:

The value of a 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.

The lower bound of a call option:

Which one of the following will cause the value of a call to decrease?

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.

A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36. The put is:

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

The intrinsic value of a call is: I. the value of the call if it were about to expire. 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.

The intrinsic value of a put is equal to the:

The owner of a call option has the:

You own both a May 20 call and a May 20 put. If the call finishes in the money,then the put will:

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

The maximum value of a call option is equal to:

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

Quiz 22: Options and Corporate Finance

The lower bound on a call's value is either the:

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:

Which of the following statements is true?

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.

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 ______

If a call has a positive intrinsic value at expiration the call is said to be:

The value of a 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.

The lower bound of a call option:

Which one of the following will cause the value of a call to decrease?

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.

A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36. The put is:

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

The intrinsic value of a call is: I. the value of the call if it were about to expire. 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.

The intrinsic value of a put is equal to the:

The owner of a call option has the:

You own both a May 20 call and a May 20 put. If the call finishes in the money,then the put will:

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

The maximum value of a call option is equal to:

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

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 __

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