Deck 22: Options and Corporate Finance

Question 1

An out-of-the-money call option is best defined as an option that:

A)has an exercise price below the current market price of the underlying security.
B)should not be exercised at this time.
C)has an exercise price equal to the current market price of the underlying security.
D)has expired.
E)qualifies as an American option.

Answer 1

should not be exercised at this time.

Question 2

Jillian owns a call option on WAN stock with a strike price of $20 a share.Currently,WAN is selling for $24.50 a share.Jillian would like to profit on this option but is not permitted to exercise the option for another two weeks.She believes the stock will decline in value before the two weeks is up.What should she do?

A)Sell her option today
B)Place an order to exercise her option on its expiration date
C)Purchase an additional call option on WAN today with a strike price of $20
D)Place an order to exercise her option as soon as she is permitted to do so
E)Convert her American option into a European option

Answer 2

Sell her option today

Question 3

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

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

Answer 3

American

Question 4

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 5

Jeff owns an American put option on 100 shares of ABC stock.The option has a strike price of $32.50 and a September expiration date.The stock has recently been declining in value,currently sells for $27.65 per share,and is expected to continue declining in value.Ignore all costs and taxes.If today is Wednesday,August 14,he:

A)cannot exercise his option even though he would like to do so.
B)should hold his option until September.
C)can exercise his option and earn a profit.
D)should exercise his option today and then sell the shares of stock on the September expiration date.
E)should let his option expire unless the stock price increases above $32.50 a share.

Question 6

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

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

Question 7

If a call option 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 8

If you are the owner of a European call option,you:

A)are obligated to buy the specified assets prior to the option's expiration.
B)have the right to sell the specified assets at the set price at any time up to and including on the expiration date.
C)have the right to buy the specified assets at the set price only on the expiration date.
D)are obligated to sell the specified assets at the set price if the option is exercised.
E)have the right to buy the specified assets at the set price at any time prior to the option's expiration.

Question 9

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 10

Which of these will increase the value of a call option? I.An increase in the market value of the underlying asset
II.An increase in the option's strike price
III.A decrease in the market value of the underlying asset
IV.A decrease in the option's strike price

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

Question 11

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

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

Question 12

The owner of a European put option has the:

A)right,but not the obligation,to sell the underlying asset at the specified price only on the specified date.
B)right,but not the obligation,to sell the underlying asset at the specified price during a specified period of time.
C)obligation to sell the underlying asset on the specified date,but only if they can do so at the specified price.
D)obligation to buy the underlying asset sometime during the specified period at the specified price.
E)right,but not the obligation,to buy the underlying asset at the exercise price on the expiration date.

Question 13

The last day on which an owner of an option can elect to exercise that option is referred to as the ________ date.

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

Question 14

Which of these will decrease the value of a put option? I.An increase in the market value of the underlying asset
II.An increase in the option's strike price
III.A decrease in the market value of the underlying asset
IV.A decrease in the option's strike price

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

Question 15

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

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

Question 16

The difference between an American option and a European option is that the American option:

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 option is an obligation to buy.
C)has an expiration date while the European option does not.
D)is written on 100 shares of the underlying security while the European option covers 1,000 shares.
E)can be exercised at any time up to the expiration date while the European option can only be exercised on the expiration date.

Question 17

A financial contract that provides its owner with 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 18

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 19

Which one of the following provides the right to sell a stock anytime during the option period at the strike price even if the market price of the stock declines to zero?

A)American call
B)European call
C)American put
D)European put
E)Should the underlying stock price decline to zero,all options are null and void.

Question 20

On the expiration day,the maximum price of a put option on a stock is the greater of the:

A)stock price minus the exercise price,or 0.
B)the exercise price or 0.
C)exercise price minus the stock price,or 0.
D)stock price or 0.
E)exercise price or the stock price.

Question 21

Eric has an option position on Langdon stock that results in a zero dollar payoff when the stock price is equal to or greater than the option strike price.What did he do to obtain this position?

A)Purchased a call option
B)Purchased a put option
C)Wrote a call option
D)Wrote a put option
E)No option position would have this result.

Question 22

The intrinsic value of a call equals the:

A)exercise price minus the stock price.
B)upper bound of the call's value.
C)market price of the call option.
D)lower bound of the call's value.
E)premium paid to purchase the call.

Question 23

New Tek announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of put options on this stock?

A)Both reactions will decrease the value.
B)Both reactions will increase the value.
C)Neither reaction will affect put option values.
D)The reactions will have offsetting effects on the value.
E)The change in volatility will have no effect while the increased stock price will decrease the value.

Question 24

Assume you are reviewing a table that lists the current stock option contracts and quotes.Which one of these statements would correctly apply to that table?

A)If you write a contract you will pay the bid price per share listed in the table.
B)If you write a contract you will receive the difference between the bid and ask prices per share.
C)The bid price on a specific contract will be higher than the ask price on that same contract.
D)To purchase one contract you must pay 1000 times the quoted bid price shown in the table.
E)To purchase one contract you must pay 100 times the quoted ask price shown in the table.

Question 25

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

Question 26

The lower bound of a call option's value:

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

Question 27

The maximum value of a call option is equal to the:

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

Question 28

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

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

Question 29

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

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

Question 30

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of call options on this stock?

A)Both reactions will decrease the value.
B)Both reactions increase the value.
C)Neither reaction will affect the value.
D)The reactions will have offsetting effects on the value.
E)The change in volatility will have no effect while the increased stock price will increase the value.

Question 31

Assume you purchase one share of a stock and sell a call option on a single share of that same stock with an exercise price of $25.What is the maximum payoff you can realize on this combination?

A)The exercise price of $25
B)An amount equal to the stock price on the option expiration date
C)An amount equal to $25 minus the stock price on the option expiration date
D)An amount equal to the stock price on the expiration date plus $25
E)Zero

Question 32

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 33

Which combination is referred to as a protective put? Assume all sales and purchases refer to ABC stock and its option contract.

A)Buying 100 shares of stock and writing one put option contract
B)Selling a put option contract and buying an offsetting call option contract
C)Buying 300 shares of stock and selling three call option contracts
D)Buying a put option contract and buying 100 shares of stock
E)Buying a put option contract and selling a call option contract with the same strike price and expiration date

Question 34

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)buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.
C)sell a put,buy a call,and buy a zero-coupon bond.
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 35

Which one of the following statements concerning call option writers is true?

A)Call option writers promise to purchase shares if the call option is exercised.
B)The call option writer has the option,but not the obligation,to purchase shares if the option is exercised.
C)The call option writer is betting that the market price of the underlying asset will increase.
D)The call option writer receives a cash payment when the option is written.
E)The call option writer earns a profit when an in-the-money option is exercised.

Question 36

Put-call parity can be used to show:

A)how far in-the-money put options can be.
B)how far in-the-money call options can be.
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 37

Assume you are reviewing a table that lists the current stock option contracts and quotes.On a specific contract the table shows an option interest value of 38 and volume of 9.This means that:

A)9 contracts were exercised on that day while 38 more were traded.
B)38 contracts were traded on that day compared to only 9 traded on the previous day.
C)9 contracts were traded on that day at a price of $.38 per share.
D)38 contracts were traded on that day at the bid price and 9 were traded at the ask price.
E)9 of the 38 outstanding contracts traded on that day.

Question 38

Selling a covered call is equivalent to:

A)buying a zero coupon bond and selling a put.
B)selling a put and buying an offsetting call.
C)buying the stock and selling the call.
D)selling a zero coupon bond and buying a put.
E)buying a zero coupon bond and buying a call.

Question 39

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 40

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

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

Question 41

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)put; $50,000.
C)warrant; $62,000.
D)call; $62,000.
E)call; $50,000.

Question 42

The delta of a call measures the:

A)time remaining to expiration compared to the option's original maturity.
B)change between an option's original value and its current value.
C)swing in the price of the call relative to the swing in the underlying stock price.
D)ratio of the change in the option price to the change in the time to expiration.
E)volatility of the underlying security.

Question 43

Alicia is considering purchasing a small building with the intent of opening a craft and sewing center.The cost of the building is $49,000 and the cost to open the center is an additional $150,000.If the center is opened and no other competition is nearby the project will provide a hefty return.However,should the vacant building down the street be used for a competitive type entity,then the center could be a losing proposition.Assume the building is purchased but the opening of the center is delayed.This situation would best be described as ________ on a craft and sewing center.

A)purchasing a call option
B)writing a call option
C)purchasing a put option
D)writing a put option
E)exercising a call on the land and writing a put

Question 44

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

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

Question 45

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 46

If you consider stockholders to be the owners of a firm,then those stockholders:

A)own a call option on the firm with an exercise price equal to the firm's total equity.
B)own a put option on the firm with an exercise price equal to the firm's total debt.
C)have written a put option on the firm with an exercise price equal to the firm's total equity.
D)have written a call option on the firm with an exercise price equal to the firm's total debt.
E)own a put option on the firm with an exercise price equal to the firm's total assets.

Question 47

Which one of the following statements is correct concerning in-the-money option values?

A)The value of a put decreases as the exercise price increases.
B)The value of a put increases as the price of the underlying stock increases.
C)The value of a call decreases as the exercise price increases.
D)An increase in the underlying stock price decreases both the value of a put and a call.
E)The value of a call decreases as the price of the underlying stock increases.

Question 48

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 49

If you consider bondholders to be the owners of a firm,then those bondholders:

A)own a call option on the firm with an exercise price equal to the firm's total equity.
B)own a put option on the firm with an exercise price equal to the firm's total debt.
C)have written a put option on the firm with an exercise price equal to the firm's total equity.
D)have written a call option on the firm with an exercise price equal to the firm's total debt.
E)own a put option on the firm with an exercise price equal to the firm's total assets.

Question 50

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 stock price

Question 51

Assume a risky firm has both bondholders and stockholders.If the firm obtains a government loan guarantee on its existing debt,who will gain from this guarantee?

A)Existing stockholders only
B)Both existing bondholders and stockholders in proportion to the firm's debt-equity ratio
C)Existing bondholders and stockholders on an equal basis
D)Existing bondholders only
E)Future stockholders only

Question 52

Assume 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)An increase in the stock 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 stock price will decrease the value of both of your options.
E)You can never profit on your positions as your profits on one option will be offset by losses on the other option.

Question 53

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 54

The intrinsic value of a put is equal to the:

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

Question 55

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 56

All else held constant,the value of a call decreases when the:

A)time to expiration increases.
B)risk-free rate of return increases.
C)stock price increases.
D)exercise price increases.
E)volatility of the price of the underlying stock increases.

Question 57

A purely financial merger:

A)increases shareholder value but does not affect bondholders.
B)decreases both bondholder and shareholder values.
C)transfers bondholder value to shareholders.
D)increases bondholder value but does not affect shareholder value.
E)reduces shareholder value while increasing bondholder value.

Question 58

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 59

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

A)Stock price,exercise price,risk-free rate,probability of occurrence,and time to expiration
B)Stock price,risk-free rate,probability of occurrence,time to maturity,and variance of the underlying asset
C)Stock price,risk-free rate,probability of occurrence,variance of the underlying asset,and exercise price
D)Stock price,exercise price,risk-free rate,variance of the underlying asset,and time to expiration
E)Exercise price,probability of occurrence,stock price,variance of the underlying asset,and time to expiration

Question 60

An increase in which one of the following will decrease the value of a call option?

A)Interest rate
B)Exercise price
C)Time to expiration
D)Stock volatility
E)Underlying asset price

Question 61

You purchased two WXO 15 call option contracts at a quoted price of $.08.What is your total profit on this investment if the price of WXO is $14.80 on the option expiration date?

A)−$20
B)−$16
C)$12
D)$16
E)$20

Question 62

You sold a put contract on EDF stock at an option price of $.25 and an exercise price of $22.50.The option expires today when EDF stock is selling for $21.70 a share.Ignoring transaction costs and taxes,what is your total profit on this investment?

A)$105
B)−$55
C)−$25
D)$55
E)$0

Question 63

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

A)−$500
B)−$50
C)$0
D)$50
E)$500

Question 64

You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an option price of $1.20.Today,the option expires and the underlying stock is selling for $33 a share.Ignoring trading costs and taxes,what is your total profit on this investment?

A)−$3,300
B)−$1,200
C)$120
D)$1,200
E)$3,300

Question 65

What is the cost of four October 40 put option contracts on a stock given the following price quotes?

A)$22
B)$26
C)$240
D)$88
E)$104

Question 66

Three months ago,you purchased three put option contracts on WXX stock with a strike price of $60 and an option price of $.60.The option expires today when the value of WXX stock is $48.10.Ignoring trading costs and taxes,what is your total profit on your investment?

A)$180
B)$3,390
C)$60
D)$1,130
E)$1,090

Question 67

You wrote ten put option contracts on JIG stock with a strike price of $40 and an option price of $.40.What is your total profit on this investment if the price of JIG is $41.05 on the option expiration date?

A)$6,450
B)$5,650
C)$400
D)−$5,650
E)−$6,450

Question 68

The market price of ABC stock has been very volatile and you think this volatility will continue for several weeks.Thus,you decide to purchase one two-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30.You also purchase one two-month put option on ABC stock with a strike price of $25 and an option price of $.50.What will be your total profit on these positions if the stock price is $25.60 on the day the options expire?

A)−$180
B)−$120
C)$100
D)$120
E)$180

Question 69

You purchased five WXO 30 call option contracts at a quoted price of $.34.What is your total profit on this investment if the price of WXO is $33.60 on the option expiration date?

A)$170
B)$326
C)$1,630
D)$1,440
E)$1,576

Question 70

You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10.Today,the option expires when the underlying stock is selling for $34.30 a share.Ignoring trading costs and taxes,what is your total profit on this investment?

A)$2,900
B)− $1,100
C)$700
D)$1,100
E)− $2,900

Question 71

You sold a put contract on EDF stock at an option price of $.50 and an exercise price of $21.Today,EDF stock is selling for $20 a share and your option position was closed out.Ignoring transaction costs and taxes,what is your total profit?

A)$50
B)$60
C)−$50
D)−$60
E)$0

Question 72

You purchased eight TJH call option contracts with a strike price of $37.50 when the option quote was $.55.The option expires today when the value of TJH stock is $37.10.Ignoring trading costs and taxes,what is your total profit on your investment?

A)$0
B)−$120
C)−$440
D)$420
E)$760

Question 73

Three months ago,you purchased a put option contract on WXX stock with a strike price of $61 and an option price of $.60.The option expires today when the value of WXX stock is $63.50.Ignoring trading costs and taxes,what is your total profit on your investment?

A)$310
B)−$60
C)$0
D)$60
E)−$190

Question 74

You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60.What is your total profit on this investment if the price of JIG is $46.05 on the option expiration date?

A)−$5,050
B)−$4,450
C)$4,100
D)$4,450
E)$5,050

Question 75

You purchased five CVB call option contracts with a strike price of $40 when the option was quoted at $3.65.The option expires today when the value of CVB stock is $43.Ignoring trading costs and taxes,what is your total profit on your investment?

A)$0
B)−$325
C)$800
D)$1,500
E)−$1,825

Question 76

Three weeks ago,you purchased a July 45 put option on RPJ stock at an option price of $3.20.The market price of RPJ stock three weeks ago was $42.70.Today,RPJ stock 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 77

Last week,you purchased one call option contract on DI stock with a strike price of $32.50 and an option price of $1.05.What is the intrinsic value per share of stock if DI is currently priced at $34.10?

A)$2.15
B)$1.60
C)$.55
D)$.93
E)$0

Question 78

What is the value of one August 25 call option contract?

A)$4.60
B)$.10
C)$615
D)$10
E)$6.15

Question 79

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

A)$280
B)$180
C)$100
D)$0
E)$29

Question 80

Several rumors concerning Wyslow stock have started circulating.These rumors are causing the market price of the stock to become increasingly volatile.Given this situation,you decide to buy both a one-month put and a one-month call option on this stock 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 on these option positions if the stock price is $6 on the day the options expire?

A)$30
B)$670
C)$690
D)$710
E)$1,110