Question 1

A decrease in which of the following will increase the value of a put option on a stock?
I.time to expiration
II.stock price
III.exercise price
IV.risk-free rate

Accepted Answer

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

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) A) and E)
G) A) and D)

Question 3

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) A) and E)
G) C) and D)

Question 4

Which of the following affect the value of a call option?
I.strike price
II.time to maturity
III.standard deviation of the returns on a risk-free asset
IV.risk-free rate

Accepted Answer

A)  I and III only
B)  II and IV only
C)  I, II, and IV only
D)  II, III, and IV only
E)  I, II, III, and IVF) A) and E)
G) All of the above C

Question 5

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 D)
G) A) and E) E

Question 6

Which one of the following statements related to the implied standard deviation (ISD) is correct?

Accepted Answer

A)  The ISD is an estimate of the historical standard deviation of the underlying security.
B)  ISD is equal to (1 - D1) .
C)  The ISD estimates the volatility of an option's price over the option's lifespan.
D)  The value of ISD is dependent upon both the risk-free rate and the time to option expiration.
E)  ISD confirms the observable volatility of the return on the underlying security.F) A) and D)
G) A) and B)

Question 7

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) All of the above
G) A) and E)

Question 8

Selling an option is generally more valuable than exercising the option because of the option's:

Accepted Answer

A)  riskless value.
B)  intrinsic value.
C)  standard deviation.
D)  exercise price.
E)  time premium.F) C) and E)
G) B) and D)

Question 9

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Accepted Answer

An increase in the risk-free rate will i...

Question 10

Assume the price of the underlying stock decreases.How will the values of the options respond to this change?
I.call value decreases
II.call value increases
III.put value decreases
IV.put value increases

Accepted Answer

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

Question 11

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Accepted Answer

Equity is equal to asset minus liabiliti...

Question 12

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Accepted Answer

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Question 13

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Accepted Answer

Because equity can be viewed as a call o...

Question 14

What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information?   Stock price $17.20 Risk-free rate 3.75 percent  Standard deviation 59 percent N(d1) 0.26016N(d2) 0.14456\begin{array} { l l } 	ext { Stock price } & \$ 17.20 \	ext { Risk-free rate } & 3.75 	ext { percent } \	ext { Standard deviation } & 59 	ext { percent } \\mathrm { N } \left( \mathrm { d } _ { 1 } ight)  & \mathbf { 0 . 2 6 0 1 6 } \\mathrm { N } \left( \mathrm { d } _ { 2 } ight)  & 0.14456\end{array} Stock price  Risk-free rate  Standard deviation N(d1​) N(d2​) ​$17.203.75 percent 59 percent 0.260160.14456​

Accepted Answer

A)  $0
B)  $0.93
C)  $1.06
D)  $1.85
E)  $2.14 F) A) and E)
G) B) and D)

Question 15

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Accepted Answer

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

Question 16

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Accepted Answer

A)  equal to one.
B)  between zero and one.
C)  equal to zero.
D)  between zero and minus one.
E)  equal to minus one.F) A) and B)
G) C) and D)

Question 17

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Accepted Answer

A)  option premium on a call with a specified exercise price.
B)  rate of return on the underlying asset.
C)  volatility of the risk-free rate of return.
D)  rate of return on a risk-free asset.
E)  option premium on a put with a specified exercise price.F) B) and C)
G) A) and D)

Question 18

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Accepted Answer

A)  American call
B)  European call
C)  American put
D)  European put
E)  either an American or a European putF) A) and D)
G) C) and D)

Question 19

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) B) and C)
G) C) and E)

Question 20

A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

Accepted Answer

A)  -0.21872
B)  -0.21179
C)  -0.21047
D)  -0.20950
E)  -0.20356F) C) and E)
G) A) and D)

Exam 25: Option Valuation

A decrease in which of the following will increase the value of a put option on a stock? I.time to expiration II.stock price III.exercise price IV.risk-free rate

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.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
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Which of the following affect the value of a call option? I.strike price II.time to maturity III.standard deviation of the returns on a risk-free asset IV.risk-free rate

Correct Answer
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C

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

Correct Answer
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E

Which one of the following statements related to the implied standard deviation (ISD) is correct?

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

Selling an option is generally more valuable than exercising the option because of the option's:

Correct Answer
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Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Correct Answer
verified
An increase in the risk-free rate will i...
View Answer

Assume the price of the underlying stock decreases.How will the values of the options respond to this change? I.call value decreases II.call value increases III.put value decreases IV.put value increases

Correct Answer
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B

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Correct Answer
verified
Equity is equal to asset minus liabiliti...
View Answer

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Correct Answer
verified
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\hlin...
View Answer

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Correct Answer
verified
Because equity can be viewed as a call o...
View Answer

Correct Answer
verified

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Correct Answer
verified

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Correct Answer
verified

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Correct Answer
verified

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Correct Answer
verified

The value of an option is equal to the:

Correct Answer
verified

A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d₁ of a 9-month call option with a strike price of $40?

Correct Answer
verified

Exam 25: Option Valuation

A decrease in which of the following will increase the value of a put option on a stock? I.time to expiration II.stock price III.exercise price IV.risk-free rate

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.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

Which of the following affect the value of a call option? I.strike price II.time to maturity III.standard deviation of the returns on a risk-free asset IV.risk-free rate

Correct AnswerverifiedC

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

Correct AnswerverifiedE

Which one of the following statements related to the implied standard deviation (ISD) is correct?

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

Selling an option is generally more valuable than exercising the option because of the option's:

Correct AnswerverifiedShow Answer

Explain how an increase in T-bill rates will affect the value of an American call and an American put.

Correct AnswerverifiedAn increase in the risk-free rate will i...View AnswerShow Answer

Assume the price of the underlying stock decreases.How will the values of the options respond to this change? I.call value decreases II.call value increases III.put value decreases IV.put value increases

Correct AnswerverifiedB

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Correct AnswerverifiedEquity is equal to asset minus liabiliti...View AnswerShow Answer

Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.

Correct Answerverified\[\begin{array} { | l | l | l | } \hlin...View AnswerShow Answer

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Correct AnswerverifiedBecause equity can be viewed as a call o...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Correct AnswerverifiedShow Answer

The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is:

Correct AnswerverifiedShow Answer

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Correct AnswerverifiedShow Answer

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Correct AnswerverifiedShow Answer

The value of an option is equal to the:

Correct AnswerverifiedShow Answer

A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

Correct AnswerverifiedShow Answer

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C

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E

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An increase in the risk-free rate will i...
View Answer

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B

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Equity is equal to asset minus liabiliti...
View Answer

Correct Answer
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\[\begin{array} { | l | l | l | }
\hlin...
View Answer

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Because equity can be viewed as a call o...
View Answer

Correct Answer
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A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d₁ of a 9-month call option with a strike price of $40?

Correct Answer
verified