Question 1

The value of an option is equal to the:

Accepted Answer

A)   intrinsic value minus the time premium.
B)   time premium plus the intrinsic value.
C)   implied standard deviation plus the intrinsic value.
D)   summation of the intrinsic value,the time premium,and the implied standard deviation.
E)   summation of delta,theta,vega,and rho.F) None of the above
G) B) and D)

Question 2

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Accepted Answer

A)   4.43 percent
B)   4.50 percent
C)   4.68 percent
D)   5.00 percent
E)   5.23 percentF) C) and D)
G) A) and B)

Question 3

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Accepted Answer

A)   sale of a European call option
B)   sale of an American put option
C)   purchase of a protective put
D)   purchase of a protective call
E)   either the sale or purchase of a putF) None of the above
G) A) and B)

Question 4

The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:

Accepted Answer

A)   $141,765.
B)   $180,219.
C)   $211,481.
D)   $264,909.
E)   $268,226.F) B) and E)
G) B) and D)

Question 5

Which of the following statements are correct?
I.Increasing the time to maturity may not increase the value of a European put.
II.Vega measures the sensitivity of an option's value to the passage of time.
III.Call options tend to be more sensitive to the passage of time than are put options.
IV.An increase in time decreases the value of a call option.

Accepted Answer

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

Question 6

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Accepted Answer

A)   risk-free rate
B)   strike price
C)   standard deviation
D)   stock price
E)   life of the optionF) B) and C)
G) A) and D)

Question 7

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Accepted Answer

A)   theta.
B)   vega.
C)   rho.
D)   delta.
E)   gamma.F) None of the above
G) A) and B)

Question 8

Today,you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset which pays 4 percent interest.The cost of the call is $1.40 per share and the amount invested in the risk-free asset is $26.57.How much total profit will you earn on these purchases if the stock has a market price of $29 one year from now?

Accepted Answer

A)   $0.10
B)   $0.85
C)   $1.16
D)   $1.20
E)   $1.27F) D) and E)
G) B) and C)

Question 9

A stock is selling for $60 per share.A call option with an exercise price of $65 sells for $3.31 and expires in 4 months.The risk-free rate of interest is 2.8 percent per year,compounded continuously.What is the price of a put option with the same exercise price and expiration date?

Accepted Answer

A)   $5.99
B)   $6.23
C)   $6.47
D)   $7.21
E)   $8.94F) A) and C)
G) All of the above

Question 10

The value of the risky debt of a firm is equal to the value of:

Accepted Answer

A)   a call option plus the value of a risk-free bond.
B)   a risk-free bond plus a put option.
C)   the equity of the firm minus a put.
D)   the equity of the firm plus a call option.
E)   a risk-free bond minus a put option.F) B) and C)
G) A) and E)

Question 11

A.K.Scott's stock is selling for $37 a share.A 3-month call on this stock with a strike price of $35 is priced at $3.40.Risk-free assets are currently returning 0.18 percent per month.What is the price of a 3-month put on this stock with a strike price of $35?

Accepted Answer

A)   $1.71
B)   $2.49
C)   $2.99
D)   $3.85
E)   $4.20F) B) and E)
G) C) and D)

Question 12

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

Accepted Answer

A)   $6,728
B)   $7,569
C)   $8,311
D)   $8,422
E)   $8,791F) C) and D)
G) B) and D)

Question 13

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

Accepted Answer

A)   put-call parity
B)   covered call
C)   protective put
D)   straddle
E)   strangleF) A) and B)
G) A) and C)

Question 14

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Accepted Answer

A)   Change in option value ≈ Change in stock value/Delta
B)   Change in option value ≈ Change in stock value/(1 - Delta) 
C)   Change in option value ≈ Change in stock value/(1 + Delta) 
D)   Change in option value ≈ Change in stock value × (1 - Delta) 
E)   Change in option value ≈ Change in stock value × DeltaF) B) and D)
G) A) and B)

Question 15

A firm has assets of $21.8 million and a 3-year,zero-coupon,risky bonds with a total face value of $8.5 million.The bonds have a total current market value of $8.1 million.How can the shareholders of this firm change these risky bonds into risk-free bonds?

Accepted Answer

A)   purchase a call option with a 1-year life and a $8.1 million face value
B)   purchase a call option with a 5-year life and a $8.5 million face value
C)   purchase a put option with a 1-year life and a $21.8 million face value
D)   purchase a put option with a 3-year life and a $8.1 million face value
E)   purchase a put option with a 3-year life and an $8.5 million face valueF) B) and E)
G) A) and B)

Question 16

Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?

Accepted Answer

A)   -$4,715
B)   -$4,685
C)   -$4,015
D)   -$215
E)   -$0F) D) and E)
G) C) and D)

Question 17

Which one of the following can be used to replicate a protective put strategy?

Accepted Answer

A)   riskless investment and stock purchase
B)   stock purchase and call option
C)   call option and riskless investment
D)   riskless investment
E)   call option,stock purchase,and riskless investmentF) A) and B)
G) A) and E)

Question 18

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Accepted Answer

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 optionF) B) and C)
G) All of the above

Question 19

A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Accepted Answer

A)   -0.01506
B)   0.05271
C)   0.05740
D)   0.06420
E)   0.06752F) A) and C)
G) C) and D)

Exam 25: Option Valuation

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Correct Answer
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Correct Answer
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A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Correct Answer
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Which one of the following can be used to replicate a protective put strategy?

Correct Answer
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Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Correct Answer
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The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Correct Answer
verified

The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:

Correct Answer
verified

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Correct Answer
verified

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Correct Answer
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The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Correct Answer
verified

A stock is selling for $60 per share.A call option with an exercise price of $65 sells for $3.31 and expires in 4 months.The risk-free rate of interest is 2.8 percent per year,compounded continuously.What is the price of a put option with the same exercise price and expiration date?

Correct Answer
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Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?

Correct Answer
verified

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

Correct Answer
verified

The value of an option is equal to the:

Correct Answer
verified

A firm has assets of $21.8 million and a 3-year,zero-coupon,risky bonds with a total face value of $8.5 million.The bonds have a total current market value of $8.1 million.How can the shareholders of this firm change these risky bonds into risk-free bonds?

Correct Answer
verified

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

Correct Answer
verified

A.K.Scott's stock is selling for $37 a share.A 3-month call on this stock with a strike price of $35 is priced at $3.40.Risk-free assets are currently returning 0.18 percent per month.What is the price of a 3-month put on this stock with a strike price of $35?

Correct Answer
verified

The value of the risky debt of a firm is equal to the value of:

Correct Answer
verified

Correct Answer
verified

Exam 25: Option Valuation

Which one of the five factors included in the Black-Scholes model cannot be directly observed?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Correct AnswerverifiedShow Answer

Which one of the following can be used to replicate a protective put strategy?

Correct AnswerverifiedShow Answer

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Correct AnswerverifiedShow Answer

The sensitivity of an option's value to a change in the risk-free rate is measured by which one of the following?

Correct AnswerverifiedShow Answer

The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:

Correct AnswerverifiedShow Answer

Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?

Correct AnswerverifiedShow Answer

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Correct AnswerverifiedShow Answer

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Correct AnswerverifiedShow Answer

A stock is selling for $60 per share.A call option with an exercise price of $65 sells for $3.31 and expires in 4 months.The risk-free rate of interest is 2.8 percent per year,compounded continuously.What is the price of a put option with the same exercise price and expiration date?

Correct AnswerverifiedShow Answer

Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?

Correct AnswerverifiedShow Answer

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

Correct AnswerverifiedShow Answer

The value of an option is equal to the:

Correct AnswerverifiedShow Answer

A firm has assets of $21.8 million and a 3-year,zero-coupon,risky bonds with a total face value of $8.5 million.The bonds have a total current market value of $8.1 million.How can the shareholders of this firm change these risky bonds into risk-free bonds?

Correct AnswerverifiedShow Answer

Travis owns a stock that is currently valued at $45.80 a share.He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45.Which one of the following terms applies to the strategy Travis is using?

Correct AnswerverifiedShow Answer

A.K.Scott's stock is selling for $37 a share.A 3-month call on this stock with a strike price of $35 is priced at $3.40.Risk-free assets are currently returning 0.18 percent per month.What is the price of a 3-month put on this stock with a strike price of $35?

Correct AnswerverifiedShow Answer

The value of the risky debt of a firm is equal to the value of:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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