Deck 22: Options and Corporate Finance

Question 1

Jeff opted to exercise his August option on August 10 and received €2,500 in exchange for his shares.Jeff must have owned a (an):

A)warrant.
B)American call.
C)American put.
D)European call.
E)European put.

Answer 1

American put.

Question 2

A _____ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.

A)futures contract
B)call option
C)put option
D)swap
E)forward contract

Answer 2

put option

Question 3

Given an exercise price E, time to maturity T and European put-call parity, the present value of the strike price E plus the call option is equal to:

A)the current market value of the share.
B)the present value of the share minus a put option.
C)a put option minus the market value of the share.
D)the value of a Treasury bill.
E)the share plus the put option.

Answer 3

the share plus the put option.

Question 4

A trading opportunity that offers a riskless profit is called a(n):

A)put option.
B)call option.
C)market equilibrium.
D)arbitrage.
E)cross-hedge.

Question 5

You can realize the same value as that derived from share ownership if you:

A)sell a put option and invest at the risk-free rate of return.
B)buy a call option and write a put option on a share and also lend out funds at the risk-free
Rate.
C)sell a put and buy a call on a share as well as invest at the risk-free rate of return.
D)lend out funds at the risk-free rate of return and sell a put option on the share.
E)borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts
Of put and call options.

Question 6

A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.

A)option
B)futures
C)forward
D)swap
E)straddle

Question 7

A _____ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.

A)futures contract
B)call option
C)put option
D)swap
E)forward contract

Question 8

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)is written on 100 shares of the underlying security while the European call covers 1,000
Shares.
E)can be exercised at any time up to the expiration date while the European call can only be
Exercised on the expiration date.

Question 9

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 10

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)strike price.
D)market price.
E)time value.

Question 11

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

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

Question 12

The relationship between the prices of the underlying share, a call option, a put option, and a riskless asset is referred to as the _____ relationship.

A)put-call parity
B)covered call
C)protective put
D)straddle
E)strangle

Question 13

An option that may be exercised at any time up its expiration date is called a(n) _____ option.

A)futures
B)Asian
C)Bermudan
D)European
E)American

Question 14

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option.

A)striking
B)exercising
C)opening
D)splitting
E)strangling

Question 15

An option that may be exercised only on the expiration date is called a(n) _____ option.

A)European
B)American
C)Bermudan
D)futures
E)Asian

Question 16

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

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

Question 17

Which one of the following provides the option of selling a share anytime during the option period at a specified price even if the market price of the share declines to zero?

A)American call.
B)European call.
C)American put.
D)European put.
E)Either an American or a European put.

Question 18

Jillian owns an option which gives her the right to purchase shares of WAN at a price of €20 a share.Currently, WAN equity is selling for €24.50.Jillian would like to profit on this share but is not
Permitted to exercise her option for another two weeks.Which of the following statements apply to
This situation?
I.Jillian must own a European call option.
II.Jillian must own an American put option.
III.Jillian should sell her option today if she feels the price of WAN will decline significantly over the
Next two week.
IV.Jillian cannot profit today from the price increase in WAN.

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 19

The last day on which an owner of an option can elect to exercise is the _____ date.

A)ex-payment
B)ex-option
C)opening
D)expiration
E)intrinsic

Question 20

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called:

A)either an American or a European option.
B)an American call.
C)an American put.
D)a European put.
E)European call.

Question 21

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

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

Question 22

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

Question 23

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 share.
C)the strike price.
D)the price of the underlying share.
E)the purchase price.

Question 24

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

A)Lowering the exercise price.
B)Increasing the time to expiration.
C)Increasing the risk-free rate.
D)Lowering the risk level of the underlying security.
E)Increasing the share price.

Question 25

Which of the following statements are correct concerning option values? I.The value of a call increases as the price of the underlying share 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 share 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 26

A 35 put option on ABC expires today.The current price of ABC is €36.The put is:

A)funded.
B)unfunded.
C)at the money.
D)in the money.
E)out of the money.

Question 27

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 put option
D)exercising an in-the-money call option
E)selling a call option

Question 28

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

A)strike price or zero, whichever is greater.
B)share price minus the exercise price or zero, whichever is greater.
C)strike price or the share price, whichever is lower.
D)strike price or zero, whichever is lower.
E)share price minus the exercise price or zero, whichever is lower.

Question 29

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 30

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

A)first have to apply the put-call parity relationship.
B)first have to compute the value of the put as if it is a call.
C)compute the value of an equivalent call and then subtract that value from one.
D)compute the value of an equivalent call and then subtract that value from the market price
Of the share.
E)compute the value of an equivalent call and then multiply that value by e-RT.

Question 31

Which of the following statements is true?

A)American options are options on securities of U.S.corporations, and the options are
Traded on American exchanges.European options are options on securities of U.S.
Corporations, but the options are traded on European exchanges.
B)American options are options on securities which are traded on American exchanges.
European options, also traded on American exchanges, are options on European
Corporations.
C)American options give the holder the right to the dividend payment.European options do
Not)
D)American options may be exercised anytime up to expiration.European options may be
Exercised only at expiration.
E)None of the above.

Question 32

The buyer of a European call option has the:

A)right but not the obligation to buy a share at a specified price on a specified date.
B)right but not the obligation to buy a share at a specified price during a specified period of
Time.
C)obligation to buy a share on a specified date but only at the specified price.
D)obligation to buy a share sometime during a specified period of time at the specified price.
E)obligation to buy a share at the lower of the exercise price or the market price on the
Expiration date.

Question 33

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

A)funded.
B)unfunded.
C)at the money.
D)in the money.
E)out of the money.

Question 34

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.

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 35

Assume that you own both a May 40 put and a May 40 call on ABC .Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

A)An increase in the share price will increase the value of your put and decrease the value of
Your call.
B)Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C)The time premiums on both your put and call are less than the time premiums on
Equivalent June options.
D)A decrease in the share price will decrease the value of both of your options.
E)You cannot profit on your position as your profits on one option will be offset by losses on
The other option.

Question 36

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

A)also finish in the money.
B)finish at the money.
C)finish out of the money.
D)either finish at the money or in the money.
E)either finish at the money or out of the money.

Question 37

You own share 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 shareholders in this firm
Basically own a _____ option on the assets of the firm with a strike price of:

A)put; €62,000.
B)put; €50,000.
C)warrant; €62,000.
D)call; €62,000.
E)call; €50,000.

Question 38

The intrinsic value of a put is equal to the:

A)lesser of the strike price or the share price.
B)lesser of the share price minus the exercise price or zero.
C)lesser of the share price or zero.
D)greater of the strike price minus the share price or zero.
E)greater of the share price minus the exercise price or zero.

Question 39

The lower bound of a call option:

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

Question 40

The value of a call increases when: I.the time to expiration increases.
II)the share price increases.
III)the risk-free rate of return increases.
IV)the volatility of the price of the underlying share 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 41

Which of the following is not true concerning call option writers?

A)Writers promise to deliver shares if exercised by the buyer.
B)The writer has the option to sell shares but not an obligation.
C)The writer's liability is zero if the option expires out-of-the-money.
D)The writer receives a cash payment from the buyer at the time the option is purchased.
E)The writer has a loss if the market price rises substantially above the exercise price.

Question 42

Tele-Tech Com announces a major expansion into Internet services.This announcement causes the price of Tele-Tech Com share to increase, but also causes an increase in price volatility of the share.
Which of the following correctly identifies the impact of these changes on the call option of Tele-
Tech Com?

A)Both changes cause the price of the call option to decrease.
B)Both changes cause the price of the call option to increase.
C)The greater uncertainty will cause the price of the call option to decrease.The higher price
Of the share will cause the price of the call option to increase.
D)The greater uncertainty will cause the price of the call option to increase.The higher price
Of the share will cause the price of the call option to decrease.
E)The greater uncertainty has no direct effect on the price of the call option.The higher
Price of the share will cause the price of the call option to decrease.

Question 43

You sold ten put option contracts on PLT with an exercise price of €32.50 and an option price of €1.10.Today, the option expires and the underlying share is selling for €34.30 a share.Ignoring
Trading costs and taxes, what is your total profit or loss onthis investment?

A)-€2,900
B)-€1,100
C)€700
D)€1,100
E)€2,900

Question 44

You wrote ten call option contracts on JIG with a strike price of €40 and an option price of €.40. What is your net gain or loss on this investment if the price of JIG is €46.05 on the option expiration
Date?

A)-€6,450
B)-€5,650
C)€400
D)€5,650
E)€6,450

Question 45

You sold a put contract on EDF at an option price of €.40.The option had an exercise price of €20. The option was exercised.Today, EDF is selling for €19 a share.What is your total profit or loss on
All of your transactions related to EDF assuming that you close out your positions in this share
Today? Ignore transaction costs and taxes.

A)-€140
B)-€60
C)€40
D)€60
E)€140

Question 46

Several rumours concerning Wyslow have started circulating.These rumours are causing the market price of the share to be quite volatile.Given this situation, you decide to buy both a one-
Month put and a call option on this share with an exercise price of €15.You purchased the call at a
Quoted price of €.20 and the put at a price of €2.10.What will be your total profit or loss on these
Option positions if the share price is €4 on the day the options expire?

A)-€230
B)€870
C)€890
D)€910
E)€1,310

Question 47

Tele-Tech Com announces a major expansion into Internet services.This announcement causes the price of Tele-Tech Com share to increase, but also causes an increase in price volatility of the share.
Which of the following correctly identifies the impact of these changes on the put option of Tele-
Tech Com?

A)Both changes cause the price of the put option to decrease.
B)Both changes cause the price of the put option to increase.
C)The greater uncertainty will cause the price of the put option to decrease.The higher price
Of the share will cause the price of the put option to increase.
D)The greater uncertainty will cause the price of the put option to increase.The higher price
Of the share will cause the price of the put option to decrease.
E)The greater uncertainty has no direct effect on the price of the put option.The higher price
Of the share will cause the price of the put option to decrease.

Question 48

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 is €41.90.Ignoring trading costs and
Taxes, what is your total profit or loss on your investment?

A)€60
B)€320
C)€360
D)€420
E)€540

Question 49

What is the intrinsic value of the August 25 call?

A)€0.10
B)€5.86
C)€6.15
D)€10.00
E)€25.00

Question 50

Three months ago, you purchased a put option on WXX with a strike price of £60 and an option price of £.60.The option expires today when the value of WXX is £62.50.Ignoring trading costs and
Taxes, what is your total profit or loss on your investment?

A)-£310
B)-£60
C)£0
D)£60
E)£190

Question 51

The market price of ABC has been very volatile and you think this volatility will continue for a few weeks.Thus, you decide to purchase a one-month call option contract on ABC share with a strike
Price of €25 and an option price of €1.30.You also purchase a one-month put option on ABC with a
Strike price of €25 and an option price of €.50.What will be your total profit or loss on these option
Positions if the share price is €24.60 on the day the options expire?

A)-€180
B)-€140
C)-€100
D)€0
E)€180

Question 52

An in-the-money put option is one that:

A)has an exercise price greater than the underlying share price.
B)has an exercise price less than the underlying share price.
C)has an exercise price equal to the underlying share price.
D)should not be exercised at expiration.
E)should not be exercised at any time.

Question 53

An out-of-the-money call option is one that:

A)Has an exercise price below the current market price of the underlying security.
B)Should not be exercised.
C)Has an exercise price above the current market price of the underlying security.
D)Both A and B.
E)Both B and C.

Question 54

Put-call parity can be used to show:

A)how far in-the-money put options can get.
B)how far in-the-money call options can get.
C)the precise relationship between put and call prices given equal exercise prices and equal
Expiration dates.
D)that the value of a call option is always twice that of a put given equal exercise prices and
Equal expiration dates.
E)that the value of a call option is always half that of a put given equal exercise prices and
Equal expiration dates.

Question 55

The delta of a call measures:

A)the change in the ending share value.
B)the change in the ending option value.
C)the swing in the price of the call relative to the swing in share price.
D)the ratio of the change in the exercise price to the change in the share price.
E)None of the above.

Question 56

You purchased four WXO 30 call option contracts at a quoted price of €.34.What is your net gain or loss on this investment if the price of WXO is €33.60 on the option expiration date?

A)-€1,576
B)-€136
C)€1,304
D)€1,440
E)€1,576

Question 57

What is the cost of five November 25 call option contracts on KNJ given the following price quotes?
KNJ (KNJ) Underlying share price: 30.86

A)€615
B)€660
C)€2,500
D)€3,075
E)€3,300

Question 58

Which of the following statements is true?

A)At expiration the maximum price of a call is the greater of (Share Price - Exercise) or 0.
B)At expiration the maximum price of a call is the greater of (Exercise - Share Price) or 0.
C)At expiration the maximum price of a put is the greater of (Share Price - Exercise) or 0.
D)At expiration the maximum price of a put is the greater of (Exercise - Share Price) or 0.
E)Both A and D.

Question 59

The Black-Scholes option pricing model is dependent on which five parameters?

A)Share price, exercise price, risk free rate, probability, and time to maturity
B)Share price, risk free rate, probability, time to maturity, and variance
C)Share price, risk free rate, probability, variance and exercise price
D)Share price, exercise price, risk free rate, variance and time to maturity
E)Exercise price, probability, share price, variance and time to maturity

Question 60

What is the value of one November 35 put contract?

A)€70
B)€460
C)€510
D)€4,600
E)€5,100

Question 61

Last week, you purchased a call option on Denver at an option price of €1.05.The share price last week was €28.10.The strike price is €27.50.What is the intrinsic value per share if Denver is
Currently priced at €29.03?

A)-€1.05
B)€0
C)€.48
D)€.93
E)€1.53

Question 62

Assume that the delta of a call option on a firm's assets is .792.This means that a €50,000 project will increase the value of equity by:

A)€27,902
B)€39,600
C)€43,820
D)€63,181
E)€89,600

Question 63

Martha B's has total assets of €1,750.These assets are expected to increase in value to either €1,800 or €2,400 by next year.The company has a pure discount bond outstanding with a face
Value of €2,000.This bond matures in one year.Currently, Treasury bills are yielding 6%.What is the
Value of the equity in this firm?

A)€16.98
B)€34.59
C)€36.67
D)€37.08
E)€51.89

Question 64

What is the value of a 9-month call with a strike price of €45 given the Black-Scholes Option Pricing Model and the following information?
Share price €48
Exercise price €45
Time to expiration .75
Risk-free rate .05
N(d1) .718891
N(d2) .641713

A)€2.03
B)€4.86
C)€6.69
D)€8.81
E)€9.27

Question 65

You currently own a one-year call option on Way-One.The current share price is €26.50 and the risk-free rate of return is 4%.Your option has a strike price of €20 and you assume that it will finish
In the money.What is the current value of your call option?

A)€6.25
B)€6.50
C)€6.76
D)€7.13
E)€7.27

Question 66

The current market value of the assets of Bigelow.is €86 million, with a standard deviation of 15% per year.The firm has zero-coupon bonds outstanding with a total face value of €45 million.These
Bonds mature in 2 years.The risk-free rate is 4% per year compounded continuously.What is the
Value of d1?

A)3.54
B)3.62
C)3.68
D)3.71
E)3.75

Question 67

The ordinary shares of Mercury Motors is selling for €43.90 a share.Treasury bills are currently yielding 4.5%.What is the current value of a one-year call option on Mercury Motors 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 68

You own two call option contracts on ABC with a strike price of €15.When you purchased the shares the option price was €1.20 and the share price was €15.90.What is the total intrinsic value of
These options if ABC is currently selling for €14.50 a share?

A)-€280
B)-€180
C)-€100
D)€0
E)€100

Question 69

Given the following information, what is the value of d2 as it is used in the Black-Scholes Option Pricing Model?
Share price €42
Time to expiration .25
Risk-free rate .055
Standard deviation .50
D1 )375161

A).021608
B).125161
C).175608
D).200161
E).250161

Question 70

GS is selling for €28 a share.A 3-month call on GS with a strike price of €30 is priced at €1.50.Risk- free assets are currently returning 0.3% per month.What is the price of a 3-month put on GS with a
Strike price of €30?

A)€0.50
B)€2.02
C)€2.73
D)€3.23
E)€4.02

Question 71

You own five put option contracts on XYZ with an exercise price of €25.What is the total intrinsic value of these contracts if XYZ is currently selling for €24.50 a share?

A)-€250
B)-€50
C)€0
D)€50
E)€250

Question 72

The ordinary shares of Winssonis currently priced at €52.50 a share.One year from now, the share price is expected to be either €54 or €60 a share.The risk-free rate of return is 4%.What is the
Value of one call option on Winsson share with an exercise price of €55?

A)€0.39
B)€0.41
C)€0.45
D)€0.48
E)€0.51

Question 73

What is the value of d2 given the following information on a share? Share price €63
Exercise price €60
Time to expiration .50
Risk-free rate 6%
Standard deviation 20%
D1 )627841

A).3133
B).4864
C).5460
D).6867
E).7349

Question 74

Tru-U is selling for €36 a share.A 3-month call on Tru-U with a strike price of €40 is priced at €1. Risk-free assets are currently returning 0.25% per month.What is the price of a 3-month put on Tru-
U with a strike price of €40?

A)€2.98
B)€3.00
C)€4.03
D)€4.70
E)€4.90

Question 75

You own one call option with an exercise price of €30 on Nadia Interiors.This 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 of return is 5% and the inflation rate is 3%.What is the current value of your option if it
Expires in one year?

A)€0.76
B)€0.79
C)€0.89
D)€0.92
E)€0.95

Question 76

You own a call option on Jasper Co.that expires in one year.The exercise price is €42.50.The current price of the share is €56.00 and the risk-free rate of return is 3.5%.Assume that the option
Will finish in the money.What is the current value of the call option?

A)€13.04
B)€13.50
C)€13.97
D)€14.94
E)€15.46

Question 77

Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value of €1,000.The risk-free rate of return is 4%.The assets of Big Ed's are expected to be worth either
€800 or €1,300 in one year.Currently, these assets are worth €1,140.What is the current value of
The debt of Big Ed's Electrical?

A)€222.46
B)€370.77
C)€514.28
D)€769.23
E)€917.54

Question 78

Three weeks ago, you purchased a July 45 put option on RPJ at an option price of €3.20.The market price of RPJ three weeks ago was €42.70.Today, RPJ is selling at €44.75 a share and the
July 45 put is priced at €.80.What is the intrinsic value of your put contract?

A)-€295
B)-€210
C)€0
D)€25
E)€110

Question 79

The assets of Blue Light Specials are currently worth €2,100.These assets are expected to be worth either €1,800 or €2,300 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%.What
Is the value of the equity in this firm?

A)€166.67
B)€231.42
C)€385.71
D)€405.00
E)€714.29

Question 80

J&L has a current market price of €55 a share.The one-year call on J&L with a strike price of €55 is priced at €2.50 while the one-year put with a strike price of €55 is priced at €1.What is the risk-free
Rate of return?

A)2.71%
B)2.76%
C)2.80%
D)2.84%
E)2.87%