Question 1

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Accepted Answer

The minimum value of the option would be $0, as the current market price of the stock is below the exercise price of the option ($36.50 < $39). In this case, it would not make financial sense for the holder of the option to exercise it and buy the stock at a higher price than what they could currently purchase it for on the market. Therefore, the option would expire worthless and have no value.

Question 2

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

Accepted Answer

When Ahmad bought put options, he had the right to sell Verizon shares at $50, which was the striking price. As the stock price was at $51.39 just before the contract expired, he would not exercise the option because he could sell the shares at a higher price in the market. Therefore, he would lose the option premium of $2.64 per share, which is the amount he paid for buying the put option. Hence, option B is the correct answer.

Question 3

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

Accepted Answer

A put option is a contract that gives the investor the right, but not the obligation, to sell the underlying asset at a predetermined price (strike price) within a specific time period. By purchasing a put option, the investor can profit from a decrease in the price of the underlying asset.

Question 4

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?

Accepted Answer

The answer of How can a currency futures contract be...

Question 5

Futures contracts

Accepted Answer

All of the statements provided in options A, B, and C are true. Therefore, option D is the correct choice. Futures contracts are commonly used by financial managers and investors to manage risk and protect against unfavorable market changes. These contracts provide the holder with the option to buy or sell an asset at a predetermined price at some point in the future, providing a measure of certainty in an uncertain market. Additionally, futures contracts can be designed to sustain a small change in value, making them a useful tool for hedging against market fluctuations.

Question 6

Unlike the owner of a(n)________ contract,the owner of a(n)________ contract does not have to exercise it.

Accepted Answer

The owner of a futures contract is obligated to fulfill the terms of the contract by either buying or selling the underlying asset at the specified price specified in the contract at the specified time. The owner of an option contract, on the other hand, has the right but not the obligation to exercise the contract. Therefore, the correct combination of contracts that have different requirements for exercise is futures and option contracts. Choice A (put, call) is incorrect as both put and call options have the same exercise rules. Choice B (option, futures) is also incorrect as it implies that futures contracts are the ones that don't require exercise, which is not the case. Choice D (long, short) is also incorrect as it only refers to the position taken by the investor in a contract, not the exercise requirements.

Question 7

The price at which the stock or asset may be purchased from (or sold to)the option writer is referred to as

Accepted Answer

The exercise price, also known as the striking price, is the price specified in the option contract at which the holder of the option can exercise their right to buy or sell the underlying asset from or to the option writer. The intrinsic value of the option is the difference between the current market price and the exercise price, and the option premium is the price that the holder pays to purchase the option contract. Open interest refers to the total number of options contracts that are outstanding in the market.

Question 8

A(n)________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

Accepted Answer

A call option gives the holder the right, but not the obligation, to buy a stated number of shares at a specified price (strike price) for a limited time. This is a type of options contract commonly used in stock trading. Option holders pay a premium to the option writer (seller) for the right to buy the underlying asset at the strike price, which can be exercised at any time before the expiration date.

Question 9

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Accepted Answer

When Erin wrote a put option on Verizon stock with a striking price of $53, she agreed to buy the stock at $53 regardless of the market price at the expiration date. As the market price is lower than the striking price, Erin is obliged to buy the Verizon shares at $53 per share, even though the market price is $3.00 lower. Therefore, she should exercise her option and buy the shares at $53.

Question 10

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

Accepted Answer

Buying put options on a stock index would allow the owner to protect their stock portfolio by securing the right to sell the index at a predetermined price. This would limit their losses in the event of a steep decline in prices. Buying call options or both call and put options would not provide adequate protection against a decline in prices, and selling put options would actually increase their exposure to risk.

Question 11

The minimum value of a call option equals

Accepted Answer

The minimum value of a call option is the intrinsic value, which is the difference between the stock price and exercise price. Therefore, the correct option is B) stock price - exercise price.

Question 12

Financial futures include

Accepted Answer

The answer of Financial futures include
...

Question 13

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

Accepted Answer

The answer of How can a gold futures contract be...

Question 14

A call option on a stock is a financial instrument defined by which of the following statements?

Accepted Answer

A call option on a stock gives the investor holding it the right, but not the obligation, to buy the stock at the specified price at the stated date in the future.

Question 15

A(n)________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

Accepted Answer

A put option gives the holder the right to sell a stated number of shares at a specified price for a limited time. This allows the holder to benefit from a decrease in the price of the underlying stock, as they can sell the shares at the predetermined higher price. A stock index futures contract and interest rate futures contract are not related to the right to sell shares, and a call option gives the holder the right to buy shares at a specified price, not sell them.

Question 16

A(n)________ can be exercised only on the expiration date.

Accepted Answer

European options can only be exercised on the expiration date, while American options can be exercised at any time before the expiration date. Therefore, option A is the correct choice.

Question 17

A futures contract is a specialized form of a forward contract distinguished by a(n)

Accepted Answer

A futures contract is a type of derivative contract that is traded on organized exchanges, which is distinct from a forward contract. Futures contracts are standardized with preset terms, including the quantity of the underlying asset, the delivery date, and the delivery location. Futures contracts are also subject to margin requirements, which are designed to protect both parties from potential losses. Clearinghouses are used to guarantee the performance of futures contracts, which reduces counterparty risk. Therefore, Choice letter D is the best option as it includes both of the distinguishing features of futures contracts.

Question 18

Mayspring Corporation common stock is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

Accepted Answer

The answer of Mayspring Corporation common stock is currently selling...

Question 19

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Accepted Answer

The profit is calculated by the difference in price ($.59 - $.57 = $.02 per lb.) multiplied by the contract size (40,000 lbs.), resulting in a profit of $800.

Question 20

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Accepted Answer

Ahmad paid a premium of $3.82 for the option. The stock price increased to $82, which is $2 above the strike price of $80. Therefore, his profit from exercising the option is $2, but after accounting for the premium paid, he incurs a net loss of $1.82 per share ($2 - $3.82 = -$1.82).

Quiz 20: Corporate Risk Management

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?

Futures contracts

Unlike the owner of a(n) contract,the owner of a(n) contract does not have to exercise it.

The price at which the stock or asset may be purchased from (or sold to) the option writer is referred to as

A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

The minimum value of a call option equals

Financial futures include

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

A call option on a stock is a financial instrument defined by which of the following statements?

A(n) ________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

A(n) ________ can be exercised only on the expiration date.

A futures contract is a specialized form of a forward contract distinguished by a(n)

Mayspring Corporation common stock is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Quiz 20: Corporate Risk Management

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?

Futures contracts

Unlike the owner of a(n) ________ contract,the owner of a(n) ________ contract does not have to exercise it.

The price at which the stock or asset may be purchased from (or sold to) the option writer is referred to as

A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by

The minimum value of a call option equals

Financial futures include

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

A call option on a stock is a financial instrument defined by which of the following statements?

A(n) ________ gives the holder the right to sell a stated number of shares at a specified price for a limited time.

A(n) ________ can be exercised only on the expiration date.

A futures contract is a specialized form of a forward contract distinguished by a(n)

Mayspring Corporation common stock is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

You sold one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.What was your profit or loss for the day?

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Unlike the owner of a(n) contract,the owner of a(n) contract does not have to exercise it.