Question 1

If a call is in the money on the expiration date then:

Accepted Answer

A call option is considered "in the money" when the stock price exceeds the strike price, giving the call intrinsic value. This means the holder can buy the stock at below its current market price.

Question 2

The price at which a call option is exercised is called the _____ price.

Accepted Answer

The price at which a call option is exercised is known as the strike price. This is the predetermined price at which the holder of the option can buy the underlying asset.

Question 3

Which of the following best defines a conversion ratio?

Accepted Answer

The conversion ratio is defined as the number of shares of stock that a holder can obtain by converting a convertible security, such as a convertible bond or preferred stock, into common stock. This ratio determines how many shares a bondholder or shareholder will receive upon conversion, making option D the correct definition.

Question 4

Which of the following best defines an American options?

Accepted Answer

An American option allows the holder to exercise the option at any time before and including its expiration date.

Question 5

Which of the following is true regarding convertible bonds?

Accepted Answer

The floor price of a convertible bond is indeed the greater of the straight bond value and the conversion value. This ensures that the bond's price does not fall below a certain level, providing a safety net for investors.

Question 6

Which of the following best defines a conversion value?

Accepted Answer

The conversion value is the value of a convertible bond if it were to be converted into common stock immediately.

Question 7

The slope of the conversion value line for a convertible bond is equal to the:

Accepted Answer

The slope of the conversion value line for a convertible bond is equal to the conversion ratio. This is because the conversion ratio determines how many shares of the company's stock the bond can be converted into, directly affecting the conversion value as the stock price changes.

Question 8

Exercising the option can best be defined as:

Accepted Answer

Exercising the option refers to the act of the option holder choosing to buy or sell the underlying asset as per the terms of the option contract. This is what happens when an option is exercised.

Question 9

Which of the following best defines a conversion price?

Accepted Answer

The conversion price is defined as the dollar amount of a bond's par value that is exchangeable for one share of stock, indicating the price at which a convertible bond or preferred share can be converted into common stock.

Question 10

Expiration date can best be defined as:

Accepted Answer

The expiration date in the context of options trading is the last day on which an option contract can be exercised. After this date, the option contract becomes invalid or expires.

Question 11

Peter owns ten European DFG 25 calls with an expiration date in September. Peter bought the calls at a price of $1.05. Today the 25 calls are priced at $13.40. Yesterday, June 14^th, DFG stock doubled in price to $42.80 a share. Today the stock is selling for $37.30 a share. Peter wants to profit from this sudden price surge before the price falls further. Ignore commissions and trading costs. Peter should:

Accepted Answer

Peter will earn more by selling the options directly in the market rather than exercising them. The profit from selling the options is calculated as follows: (Current option price - Purchase price) * Number of options * 100 = ($13.40 - $1.05) * 10 * 100 = $12,350. This does not require exercising the options and directly selling the underlying stock, which would involve additional steps and potentially different profit calculations.

Question 12

Which of the following best defines a call option?

Accepted Answer

A call option gives the holder the right, but not the obligation, to buy an asset at a specified price within a specific time period.

Question 13

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

Accepted Answer

The strike price is the fixed price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset, making it the correct answer.

Question 14

ZXC stock is currently priced at $42.27 a share. The six-month puts are priced at $0.80 and have a $42.50 strike price. Fred owns 1,000 shares of ZXC stock and wants to sell it for the best possible price. Fred should:

Accepted Answer

Selling the shares directly at the market price is the best option for Fred if he wants to sell his shares for the best possible price. Buying or selling puts and then exercising them immediately does not make sense in this context, as exercising a put option allows the holder to sell shares at the strike price, which is slightly higher than the market price but would incur the cost of the put itself, reducing the overall proceeds. Selling the shares directly avoids any additional costs and takes advantage of the current market price.

Question 15

In the Black-Scholes call option pricing model, N(d₁) is the probability that:

Accepted Answer

N(d1) represents the cumulative distribution function of a standard normal distribution, indicating the probability that a standard normal random variable is less than or equal to d1.

Question 16

Warrants are generally:

Accepted Answer

Warrants are typically issued as part of a bond or stock offering and can be separated from the security they were originally attached to and then traded independently.

Question 17

The buyer of a European put has the:

Accepted Answer

The buyer of a European put option has the right, but not the obligation, to sell an asset at the strike price on the expiration date. This contrasts with American options, which can be exercised at any time up to and including the expiration date.

Question 18

The seller of an American call has the:

Accepted Answer

The seller (also known as the writer) of an American call option has the obligation to sell the underlying asset at the strike price if the buyer decides to exercise the option on or before its expiration date.

Question 19

Striking price can best be defined as:

Accepted Answer

The striking price, also known as the exercise price or strike price, is the fixed price specified in an option contract at which the holder can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset. This definition matches choice B.

Question 20

A _____ is a _____ on the assets of a leveraged firm.

Accepted Answer

A stock in a leveraged firm can be viewed as a call option on the firm's assets because the stockholders have the right, but not the obligation, to "buy" the firm back from the bondholders by paying off the debt, similar to how a call option gives the holder the right to buy an asset at a certain price.

Quiz 25: Options and Corporate Securities

If a call is in the money on the expiration date then:

The price at which a call option is exercised is called the _____ price.

Which of the following best defines a conversion ratio?

Which of the following best defines an American options?

Which of the following is true regarding convertible bonds?

Which of the following best defines a conversion value?

The slope of the conversion value line for a convertible bond is equal to the:

Exercising the option can best be defined as:

Which of the following best defines a conversion price?

Expiration date can best be defined as:

Which of the following best defines a call option?

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

ZXC stock is currently priced at $42.27 a share. The six-month puts are priced at $0.80 and have a $42.50 strike price. Fred owns 1,000 shares of ZXC stock and wants to sell it for the best possible price. Fred should:

In the Black-Scholes call option pricing model, N(d₁) is the probability that:

Warrants are generally:

The buyer of a European put has the:

The seller of an American call has the:

Striking price can best be defined as:

A _ is a _ on the assets of a leveraged firm.

Quiz 25: Options and Corporate Securities

If a call is in the money on the expiration date then:

The price at which a call option is exercised is called the _____ price.

Which of the following best defines a conversion ratio?

Which of the following best defines an American options?

Which of the following is true regarding convertible bonds?

Which of the following best defines a conversion value?

The slope of the conversion value line for a convertible bond is equal to the:

Exercising the option can best be defined as:

Which of the following best defines a conversion price?

Expiration date can best be defined as:

Which of the following best defines a call option?

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

ZXC stock is currently priced at $42.27 a share. The six-month puts are priced at $0.80 and have a $42.50 strike price. Fred owns 1,000 shares of ZXC stock and wants to sell it for the best possible price. Fred should:

In the Black-Scholes call option pricing model, N(d1) is the probability that:

Warrants are generally:

The buyer of a European put has the:

The seller of an American call has the:

Striking price can best be defined as:

A _____ is a _____ on the assets of a leveraged firm.

In the Black-Scholes call option pricing model, N(d₁) is the probability that:

A _ is a _ on the assets of a leveraged firm.