Fin 534

Only available on StudyMode
  • Download(s) : 673
  • Published : September 9, 2012
Open Document
Text Preview
Question 1

Call options on XYZ Corporation’s common stock trade in the market. Which of the following statements is most correct, holding other things constant? Answer

Correct Answer:
The price of these call options is likely to rise if XYZ’s stock price rises.

Question 2

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Correct Answer:
All of the above.

Question 3

Which of the following statements is CORRECT?

Correct Answer:
If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Question 4

Which of the following statements is CORRECT?

Correct Answer:
If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Question 5

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Correct Answer:
Covered

Question 6

An option that gives the holder the right to sell a stock at a specified price at some future time is

Correct Answer:
a put option.

Question 7
2 out of 2 points

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

Correct Answer:
$2.99

Question 8
2 out of 2 points

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option? Answer

Correct Answer:
$9.00

Question 9

Which of the following statements is CORRECT?

Correct Answer:
The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.

Question 10

Deeble Construction Co.’s stock is trading at $30 a share. Call options on the company’s stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?

Correct Answer:
If Deeble’s stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.

Question 11
2 out of 2 points

Which of the following statements is CORRECT?

Correct Answer:
Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.

Question 12

Warner Motors’ stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct Answer:
The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

Question 13
2 out of 2 points

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's...
tracking img