Question 1

Which of the following statements is false?

Accepted Answer

B) A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the value of debt outstanding.

Question 2

Consider the following equation: C = S - K + dis(K)+ P - PV(Div)
In this equation,dis(K)+ P - PV(Div)tells us

Accepted Answer

The term dis(K)+ P - PV(Div) represents the time value of the option, which is the difference between the market value of the option and its intrinsic value. Therefore, the correct answer is D.

Question 3

Which of the following statements is false?

Accepted Answer

B) Another way to view corporate debt is as a portfolio of riskless debt and a short position in a put option on the firm's assets with a strike price equal to the required debt payment.

Question 4

Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.

Accepted Answer

The answer of Describe the conditions when it would be...

Question 5

KD Industries' stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The maximum value of this put option is:

Accepted Answer

C) maximum value for a put equals its strike price = $30

Question 6

Which of the following statements is false?

Accepted Answer

A European option can be worth less than its American counterpart because American options allow for early exercise, giving them more flexibility and therefore potentially more value.

Question 7

Which of the following statements is false?

Accepted Answer

C) It is never optimal to exercise a call option on a non-dividend-paying stock early - you are always better off just selling the option.

Question 8

KD Industries' stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:

Accepted Answer

A) Intrinsic value = max(K - S, 0) = max(30 - 32, 0) = $0

Question 9

Which of the following statements is false?

Accepted Answer

C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is lower.

Question 10

Which of the following statements is false?

Accepted Answer

C) The value of an option generally increases with the volatility of the stock.

Question 11

When the firm's assets are worth ________ the required debt payment,the put is ________; the owner of the put option will therefore exercise the option and receive the difference between the required debt payment and the firm's asset value.

Accepted Answer

When the firm's assets are worth less than the required debt payment, the put is in-the-money. The owner of the put option will exercise the option and receive the difference between the required debt payment and the firm's asset value.

Question 12

Consider the following equation: C = S - K + dis(K)+ P
In this equation,S - K tells us

Accepted Answer

S - K represents the difference between the current stock price (S) and the strike price (K). This is known as the intrinsic value of the option, which is the amount of profit that could be made if the option were exercised immediately. Therefore, the best choice is D - the intrinsic value of the option.

Question 13

The price of any call option on a ________ stock is always ________ its intrinsic value.

Accepted Answer

The price of a call option on a non-dividend-paying stock is always greater than its intrinsic value due to the time value of money. The option's price includes not only its intrinsic value but also a time value component, reflecting the potential for further gains in the stock's price before the option expires.

Question 14

Which of the following will NOT increase the value of a put option?

Accepted Answer

A put option gives the holder the right to sell the underlying asset at a specified price (strike price) within a specified time period. An increase in the time to maturity (A), a decrease in the stock price (B), and an increase in the exercise price (D) are all factors that can increase the value of a put option. However, a decrease in the stock's volatility (C) will decrease the value of a put option, as it reduces the likelihood that the stock price will fall below the strike price before expiration. Therefore, option C is the correct answer.

Question 15

The intrinsic value of an option is the value it would have ________.

Accepted Answer

The intrinsic value of an option is the value it would have if it expired immediately, reflecting the immediate exercise value of the option based on the current price of the underlying asset relative to the strike price.

Question 16

The intrinsic value is the amount by which the option is currently ________,or 0 if the option is ________.

Accepted Answer

Intrinsic value is the difference between the current market price and the strike price of an option. If the market price is higher than the strike price (in-the-money), the intrinsic value will be positive. If the market price is lower than the strike price (out-of-the-money), the intrinsic value will be zero. Therefore, B is the correct choice as it indicates that the option is in-the-money, which means it has positive intrinsic value.

Quiz 20: Financial Options

Which of the following statements is false?

Consider the following equation: C = S - K + dis(K) + P - PV(Div) In this equation,dis(K) + P - PV(Div) tells us

Which of the following statements is false?

Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.

KD Industries' stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The maximum value of this put option is:

Which of the following statements is false?

Which of the following statements is false?

KD Industries' stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:

Which of the following statements is false?

Which of the following statements is false?

When the firm's assets are worth the required debt payment,the put is ; the owner of the put option will therefore exercise the option and receive the difference between the required debt payment and the firm's asset value.

Consider the following equation: C = S - K + dis(K) + P In this equation,S - K tells us

The price of any call option on a stock is always its intrinsic value.

Which of the following will NOT increase the value of a put option?

The intrinsic value of an option is the value it would have ________.

The intrinsic value is the amount by which the option is currently ,or 0 if the option is .