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Chapter 22 - Options and Corporate FinanceChapter 22Options and Corporate Finance Multiple Choice Questions1.A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _ contract.A.optionB.futuresC.forwardD.swapE.straddle2.The act where an owner of an option buys or sells the underlying asset, as is his right, is called _ the option.A.strikingB.exercisingC.openingD.splittingE.strangling3.The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the options:A.opening price.B.intrinsic value.C.strike price.D.market price.E.time value.4.The last day on which an owner of an option can elect to exercise is the _ date.A.ex-paymentB.ex-optionC.openingD.expirationE.intrinsic5.An option that may be exercised at any time up to its expiration date is called a(n) _ option.A.futuresB.AsianC.BermudanD.EuropeanE.American6.An option that may be exercised only on the expiration date is called a(n) _ option.A.EuropeanB.AmericanC.BermudanD.futuresE.Asian7.A _ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.A.futures contractB.call optionC.put optionD.swapE.forward contract8.A _ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.A.futures contractB.call optionC.put optionD.swapE.forward contract9.A trading opportunity that offers a riskless profit is called a(n):A.put option.B.call option.C.market equilibrium.D.arbitrage.E.cross-hedge.10.The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an options _ value.A.strikeB.marketC.volatilityD.timeE.intrinsic11.The relationship between the prices of the underlying stock, a call option, a put option, and a riskless asset is referred to as the _ relationship.A.put-call parityB.covered callC.protective putD.straddleE.strangle12.The effect on an options value of a small change in the value of the underlying asset is called the option:A.theta.B.vega.C.rho.D.delta.E.gamma.13.An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called:A.either an American or a European option.B.an American call.C.an American put.D.a European put.E.a European call.14.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?A.American callB.European callC.American putD.European putE.either an American or a European put15.Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to:A.the current market value of the stock.B.the present value of the stock minus a put option.C.a put option minus the market value of the share of stock.D.the value of a U.S. Treasury bill.E.the share of stock plus the put option.16.You can realize the same value as that derived from stock ownership if you:A.sell a put option and invest at the risk-free rate of return.B.buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.C.sell a put and buy a call on a stock as well as invest at the risk-free rate of return.D.lend out funds at the risk-free rate of return and sell a put option on the stock.E.borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.17.Which one of the following statements correctly describes your situation as the owner of an American call option?A.You are obligated to buy at a set price at any time up to and including the expiration date.B.You have the right to sell at a set price at any time up to and including the expiration date.C.You have the right to buy at a set price only on the expiration date.D.You are obligated to sell at a set price if the option is exercised.E.You have the right to buy at a set price at any time up to and including the expiration date.18.Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares. Jeff must have owned a (an):A.warrant.B.American call.C.American put.D.European call.E.European put.19.Jillian owns an option which gives her the right to purchase shares of WAN stock at a price of $20 a share. Currently, WAN stock is selling for $24.50. Jillian would like to profit on this stock but is not permitted to exercise her option for another two weeks.Which of the following statements apply to this situation?I. Jillian must own a European call option.II. Jillian must own an American put option.III. Jillian should sell her option today if she feels the price of WAN stock will decline significantly over the next two weeks.IV. Jillian cannot profit today from the price increase in WAN stock.A.I and III onlyB.II and IV onlyC.I and IV onlyD.II and III onlyE.I, III, and IV only20.The difference between an American call and a European call is that the American call:A.has a fixed exercise price while the European exercise price can vary within a small range.B.is a right to buy while a European call is an obligation to buy.C.has an expiration date while the European call does not.D.is written on 100 shares of the underlying security while the European call covers 1,000 shares.E.can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.21.If a call has a positive intrinsic value at expiration the call is said to be:A.funded.B.unfunded.C.at the money.D.in the money.E.out of the money.22.A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36.The put is:A.funded.B.unfunded.C.at the money.D.in the money.E.out of the money.23.The maximum value of a call option is equal to:A.the strike price minus the initial cost of the option.B.the exercise price plus the price of the underlying stock.C.the strike price.D.the price of the underlying stock.E.the purchase price.24.The lower bound on a calls value is either the:A.strike price or zero, whichever is greater.B.stock price minus the exercise price or zero, whichever is greater.C.strike price or the stock price, whichever is lower.D.strike price or zero, whichever is lower.E.stock price minus the exercise price or zero, whichever is lower.25.The lower bound of a call option:A.can be a negative value regardless of the stock or exercise prices.B.can be a negative value but only when the exercise price exceeds the stock price.C.can be a negative value but only when the stock price exceeds the exercise price.D.must be greater than zero.E.can be equal to zero.26.The intrinsic value of a call is:I. the value of the call if it were about to expire.II. equal to the lower bound of a calls value.III. another name for the market price of a call.IV. always equal to zero if the call is currently out of the money.A.I and III onlyB.II and IV onlyC.I and II onlyD.II, III, and IV onlyE.I, II, and IV only27.The intrinsic value of a put is equal to the:A.lesser of the strike price or the stock price.B.lesser of the stock price minus the exercise price or zero.C.lesser of the stock price or zero.D.greater of the strike price minus the stock price or zero.E.greater of the stock price minus the exercise price or zero.28.Which of the following statements are correct concerning option values?I. The value of a call increases as the price of the underlying stock increases.II. The value of a call decreases as the exercise price increases.III. The value of a put increases as the price of the underlying stock increases.IV. The value of a put decreases as the exercise price increases.A.I and III onlyB.II and IV onlyC.I and II onlyD.II and III onlyE.I, II, and IV only29.The value of a call increases when:I. the time to expiration increases.II. the stock price increases.III. the risk-free rate of return increases.IV. the volatility of the price of the underlying stock increases.A.I and III onlyB.II, III, and IV onlyC.I, III, and IV onlyD.I, II, and III onlyE.I, II, III, and IV30.Which one of the following will cause the value of a call to decrease?A.lowering the exercise priceB.increasing the time to expirationC.increasing the risk-free rateD.lowering the risk level of the underlying securityE.increasing the stock price31.Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.A.An increase in the stock price will increase the value of your put and decrease the value of your call.B.Both a May 45 put and a May 45 call will have higher values than your May 40 options.C.The time premiums on both your put and call are less than the time premiums on equivalent June options.D.A decrease in the stock price will decrease the value of both of your options.E.You cannot profit on your position as your profits on one option will be offset by losses on the other option.32.You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:A.also finish in the money.B.finish at the money.C.finish out of the money.D.either finish at the money or in the money.E.either finish at the money or out of the money.33.You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _ option on the assets of the firm with a strike price of _A.put; $62,000.B.put; $50,000.C.warrant; $62,000.D.call; $62,000.E.call; $50,000.34.The owner of a call option has the:A.right but not the obligation to buy a stock at a specified price on a specified date.B.right but not the obligation to buy a stock at a specified price during a specified period of time.C.obligation to buy a stock on a specified date but only at the specified price.D.obligation to buy a stock sometime during a specified period of time at the specified price.E.obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.35.In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is:A.less than or equal to N(d2).B.less than one.C.equal to one.D.equal to d1.E.less than or equal to d1.36.To compute the value of a put using the Black-Scholes option pricing model, you:A.first have to apply the put-call parity relationship.B.first have to compute the value of the put as if it is a call.C.compute the value of an equivalent call and then subtract that value from one.D.compute the value of an equivalent call and then subtract that value from the market price of the stock.E.compute the value of an equivalent call and then multiply that value by e-RT.37.If you consider the equity of a firm to be an option on the firms assets then the act of paying off debt is comparable to _ on the assets of the firm.A.purchasing a put optionB.purchasing a call optionC.exercising an in-the-money put optionD.exercising an in-the-money call optionE.selling a call option38.For every positive net present value project that a firm undertakes, the equity in the firm will increase the most if the delta of the call option on the firms assets is:A.equal to one.B.between zero and one.C.equal to zero.D.between zero and minus one.E.equal to minus one.39.Shareholders in a leveraged firm might wish to accept a negative net present value project if:A.it increases the standard deviation of the returns on the firms assets.B.it lowers the variance of the returns on the firms assets.C.it lowers the risk level of the firm.D.it diversifies the cash flows of the firm.E.it decreases the risk that a firm will default on its debt.40.Which of the following statements is true?A.American options are options on securities of U.S. corporations, and the options are traded on American exchanges. European options are options on securities of U.S. corporations, but the options are traded on European exchanges.B.American options are options on securities which are traded on American exchanges. European options, also traded on American exchanges, are options on European corporations.C.American options give the holder the right to the dividend payment. European options do not.D.American options may be exercised anytime up to expiration. European options may be exercised only at expiration.E.None of the above.41.An out-of-the-money call option is one that:A.has an exercise price below the current market price of the underlying security.B.should not be exercised.C.has an exercise price above the current market price of the underlying security.D.Both A and B.E.Both B and C.42.Which of the following is not true concerning call option writers?A.Writers promise to deliver shares if exercised by the buyer.B.The writer has the option to sell shares but not an obligation.C.The writers liability is zero if the option expires out-of-the-money.D.The writer receives a cash payment from the buyer at the time the option is purchased.E.The writer has a loss if the market price rises substantially above the exercise price.43.An in-the-money put option is one that:A.has an exercise price greater than the underlying stock price.B.has an exercise price less than the underlying stock price.C.has an exercise price equal to the underlying stock price.D.should not be exercised at expiration.E.should not be exercised at any time.44.Which of the following statements is true?A.At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0.B.At expiration the maximum price of a call is the greater of (Exercise - Stock Price) or 0.C.At expiration the maximum price of a put is the greater of (Stock Price - Exercise) or 0.D.At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0.E.Both A and D.45.Put-call parity can be used to show:A.how far in-the-money put options can get.B.how far in-the-money call options can get.C.the precise relationship between put and call prices given equal exercise prices and equal expiration dates.D.that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates.E.that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates.Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock.46.Which of the following correctly identifies the impact of these changes on a call option of Tele-Tech Com?A.Both changes cause the price of the call option to decrease.B.Both changes cause the price of the call option to increase.C.The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase.D.The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease.E.The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease.47.Which of the following correctly identifies the impact of these changes on a put option of Tele-Tech Com?A.Both changes cause the price of the put option to decrease.B.Both changes cause the price of the put option to increase.C.The greater uncertainty will cause the price of the put option to decrease. The higher price of the stock will cause the price of the put option to increase.D.The greater uncertainty will cause the price of the put option to increase. The higher price of the stock will cause the price of the put option to decrease.E.The greater uncertainty has no direct effect on the price of the put option. The higher price of the stock will cause the price of the put option to decrease.48.The delta of a call measures:A.the change in the ending stock value.B.the change in the ending option value.C.the swing in the price of the call relative to the swing in stock price.D.the ratio of the change in the exercise price to the change in the stock price.E.None of the above.49.The Black-Scholes option pricing model is dependent on which five parameters?A.Stock price, exercise price, risk free rate, probability, and time to maturityB.Stock price, risk free rate, probability, time to maturity, and varianceC.Stock price, risk free rate, probability, variance and exercise priceD.Stock price, exercise price, risk free rate, variance and time to maturityE.Exercise price, probability, stock price, variance and time to maturity50.What is the cost of five November 25 call option contracts on KNJ stock given the following price quotes?A.$615B.$660C.$2,500D.$3,075E.$3,30051.What is the value of one November 35 put contract?A.$70B.$460C.$510D.$4,600E.$5,10052.What is the intrinsic value of the August 25 call?A.$0.10B.$5.86C.$6.15D.$10.00E.$25.0053.You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30. The option expires today when the value of TJH stock is $41.90. Ignoring trading costs and taxes, what is your total profit or loss on your investment?A.$60B.$320C.$360D.$420E.$54054.You purchased four WXO 30 call option contracts at a quoted price of $.34. What is your net gain or loss on this investment if the price of WXO is $33.60 on the option expiration date?A.-$1,576B.-$136C.$1,304D.$1,440E.$1,57655.You wrote ten call option contracts on JIG stock with a strike price of $40 and an option price of $.40. What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?A.-$6,450B.-$5,650C.$400D.$5,650E.$6,45056.The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?A.-$180B.-$140C.-$100D.$0E.$18057.Several rumors concerning Wyslow, Inc. stock
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