Question 1

Assume you purchased a call option with an exercise price of $720 and a premium of $80.50. How do you compute the stock price that is required to break even on this investment? What would your percentage rate of return be if the stock price rose to $810?

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Question 2

Why would bondholders be willing to pay more for bonds that contain warrants?

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Question 3

Investors who buy calls or puts have a cap on their possible losses from holding options. Specifically, they cannot lose more than the value of their premium. How does this differ for investors who sell options?

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Question 4

Circular File stock is selling for $25 a share. You see that call options on the stock with an exercise price of $20 are selling at $3. What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with an exercise price $30 are selling for $4. What should you do?

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Question 5

Define and briefly explain the relationship between the value of a call option and the following five factors: stock price, exercise price, interest rate, time to expiration, volatility of stock price.

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Question 6

What options may be present in capital investment proposals?

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Question 7

A real estate developer buys 70 acres of land in a rural area, planning to build a subdivision on the land if and when the population from the city begins to expand into the area. If population growth is less than anticipated, the developer believes that the land can be sold to a country club that would build a golf course on the property.
a. In what way does the possibility of sale to the country club provide a put option to the developer?
b. What is the exercise price of the option? The asset value?
c. How does the golf course option increase the NPV of the land project to the developer?

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Question 8

What price risk is an investor exposed to if he owns a share of stock and has purchased a put option on the stock?

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Question 9

What is a callable bond and how is its value determined?

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Question 10

A share of stock is currently selling for $80. The $80 call option is priced at $8 and the $80 put option is priced at $4. Assume an investor buys one share, one call, and one put option. What is the net profit for this strategy at expiration day stock prices of $0, $50, $80, $86, and $110? Define in words the maximum potential loss and the maximum potential gain for this strategy. What value does the put add to this strategy? What value does the call add?

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Question 11

What are the determinants of a call option's value?

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Question 12

You own a $1,000 face value convertible bond with a coupon rate of 6% that matures in 5 years. The market rate on similar bonds is currently 7%. The conversion ratio is 15.5 and the stock is currently selling for $70 per share. What is the current value of this bond? Justify your answer.

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Question 13

What is the payoff to buyers and sellers of call and put options?

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Question 14

A 10-year convertible bond with a 6% coupon is selling for $1,050. Each bond can be exchanged for 20 shares and the stock price currently is $49 per share. Other comparable bonds are selling at a yield to maturity of 8%. What is the value of the bondholders' call option? Why is the bond selling for more than its conversion value?

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Question 15

How does the price of a put option respond to the following changes, other things being equal? Does the put price go up or down?
a. Stock price increases.
b. Exercise price increases.
c. Risk-free interest rate increases.
d. Expiration date of the option is extended.
e. Volatility of the stock price falls.
f. Time passes, so the option's expiration date comes closer.

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Question 16

Generalize the formulas for determining the value of the following four option types: buying a call, buying a put, writing a call, writing a put.

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Question 17

What options may be provided in financial securities?

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Question 18

For each of the following option and securities combinations show what the payoff would be when the option expires. Assume that each option has an exercise price of $100 and the same expiration date. Use "S" to symbolize the stock price at expiration.
a. Buy a call and invest the present value of the exercise price in a bank deposit
b. Buy a share and a put option on the share
c. Buy a share, buy a put option on the share, and sell a call option on the share
d. Buy a call option and a put option on the share

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Question 19

Define the put-call parity relationship.

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Quiz 23: Options