Question 1

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Accepted Answer

A)   be in default.
B)   be leveraged.
C)   pay dividends.
D)   have a negative cash flow from operations.
E)   have a negative cash flow from assets.F) A) and E)
G) A) and D)

Question 2

The primary purpose of a protective put is to:

Accepted Answer

A)   ensure a maximum purchase price in the future.
B)   offset an equivalent call option.
C)   limit the downside risk of asset ownership.
D)   lock in a risk-free rate of return on a financial asset.
E)   increase the upside potential return on an investment.F) A) and C)
G) B) and E)

Question 3

Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(d₁)  value of .62789, and an N(d₂)  value of .54232. What is the value of a 3-month call option with a strike price of $30 given the Black-Scholes option pricing model?

Accepted Answer

A)   $3.38
B)   $3.99
C)   $3.68
D)   $1.76
E)   $3.45F) A) and B)
G) D) and E)

Question 4

If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to?

Accepted Answer

A)   1/ln1.065
B)   6.10%
C)   ln1.065
D)   6.24%
E)   e¹.⁰⁶⁵ − 1F) A) and E)
G) C) and D)

Question 5

Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum total amount you can lose over the next year on these purchases?

Accepted Answer

A)   −$15,105
B)   −$11,050
C)   −$160
D)   −$105
E)   $0F) A) and E)
G) B) and D)

Question 6

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 this strategy?

Accepted Answer

A)   Put-call parity
B)   Covered call
C)   Protective put
D)   Straddle
E)   StrangleF) C) and E)
G) A) and E)

Question 7

Use the information below to answer the following question. 
Upside Down has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $12,400 while the standard deviation of the returns on those assets is 22 percent annually. The annual risk-free rate is 4.6 percent, compounded continuously. What is the market value of the firm's debt based on the Black-Scholes model?

Accepted Answer

A)   $8,415
B)   $8,900
C)   $9,413
D)   $8,962
E)   $9,311F) B) and E)
G) B) and C)

Question 8

A put option that expires in eight months with an exercise price of $55 sells for $7.34. The stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded continuously. What is the price of a call option with the same exercise price and expiration date?

Accepted Answer

A)   $5.67
B)   $5.47
C)   $5.34
D)   $4.71
E)   $4.92F) A) and D)
G) B) and C)

Question 9

Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free rate of 2.40 percent, standard deviation of 57 percent, and a d₁ value of .27167. What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Accepted Answer

A)   −.22196
B)   −.18657
C)   −.18241
D)   −.27427
E)   −.22238F) C) and D)
G) A) and B)

Question 10

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

Question 11

You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now?

Accepted Answer

A)   $3,728
B)   $4,837
C)   $4,311
D)   $3,422
E)   $3,791F) A) and C)
G) A) and B)

Question 12

Use the information below to answer the following question. 
Assume a stock price of $42; a risk-free rate of 3.5 percent per year, compounded continuously; a six-month maturity; and a standard deviation of 64 percent per year. If a six-month call with an exercise price of $45 is priced at $6.66, what is the price of the six-month $45 put?

Accepted Answer

A)   $8.57
B)   $7.93
C)   $8.88
D)   $9.07
E)   $8.74F) C) and D)
G) A) and B)

Question 13

All of the following affect the value of a call option except the:

Accepted Answer

A)   strike price.
B)   stock price.
C)   standard deviation of the returns on a risk-free asset.
D)   continuously compounded risk-free rate.
E)   time to maturity.F) D) and E)
G) B) and C)

Question 14

A firm has assets of $16.4 million and 2-year, zero-coupon, risky bonds with a total face value of $7.4 million. The bonds have a total current market value of $7.1 million. The shareholders of this firm can change these risky bonds into risk-free bonds by purchasing a ________ option with a 2-year life and a strike price of ________ million.

Accepted Answer

A)   call; $7.1
B)   call; $7.4
C)   put; $16.4
D)   put; $7.1
E)   put; $7.4F) A) and D)
G) B) and C)

Question 15

Purely financial mergers:

Accepted Answer

A)   are beneficial to stockholders.
B)   are beneficial to both stockholders and bondholders.
C)   are detrimental to stockholders.
D)   add value to both the total assets and the total equity of a firm.
E)   reduce both the total assets and the total equity of a firm.F) A) and B)
G) C) and D)

Question 16

Use the information below to answer the following question. 
S&C Co. has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm's assets is $23,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. What is the firm's continuously compounded cost of debt?

Accepted Answer

A)   11.24 percent
B)   20.32 percent
C)   16.48 percent
D)   18.69 percent
E)   17.09 percentF) B) and C)
G) C) and D)

Question 17

A purely financial merger:

Accepted Answer

A)   increases the risk that the merged firm will default on its debt obligations.
B)   has no effect on the risk level of the firm's debt.
C)   reduces the value of the option to go bankrupt.
D)   has no effect on the equity value of a firm.
E)   reduces the risk level of the firm thereby increasing the value of the firm's equity.F) D) and E)
G) B) and D)

Question 18

Which one of the five factors included in the Black-Scholes option pricing 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) C) and D)

Question 19

Selling a call 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) A) and E)
G) A) and D)

Question 20

A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45?

Accepted Answer

A)   $.57
B)   $.63
C)   $.91
D)   $1.36
E)   $1.54F) A) and E)
G) A) and B)

Exam 25: Option Valuation

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Correct Answer
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Selling a call option is generally more valuable than exercising the option because of the option's:

Correct Answer
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Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(d₁) value of .62789, and an N(d₂) value of .54232. What is the value of a 3-month call option with a strike price of $30 given the Black-Scholes option pricing model?

Correct Answer
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The value of an option is equal to the:

Correct Answer
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You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now?

Correct Answer
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If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to?

Correct Answer
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A purely financial merger:

Correct Answer
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Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum total amount you can lose over the next year on these purchases?

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

Correct Answer
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A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45?

Correct Answer
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A put option that expires in eight months with an exercise price of $55 sells for $7.34. The stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded continuously. What is the price of a call option with the same exercise price and expiration date?

Correct Answer
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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 this strategy?

Correct Answer
verified

Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free rate of 2.40 percent, standard deviation of 57 percent, and a d₁ value of .27167. What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Correct Answer
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Purely financial mergers:

Correct Answer
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Correct Answer
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The primary purpose of a protective put is to:

Correct Answer
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Correct Answer
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All of the following affect the value of a call option except the:

Correct Answer
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Exam 25: Option Valuation

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(d₁) value of .62789, and an N(d₂) value of .54232. What is the value of a 3-month call option with a strike price of $30 given the Black-Scholes option pricing model?

Correct AnswerverifiedShow Answer

The value of an option is equal to the:

Correct AnswerverifiedShow Answer

You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to?

Correct AnswerverifiedShow Answer

A purely financial merger:

Correct AnswerverifiedShow Answer

Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum total amount you can lose over the next year on these purchases?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45?

Correct AnswerverifiedShow Answer

A put option that expires in eight months with an exercise price of $55 sells for $7.34. The stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded continuously. What is the price of a call option with the same exercise price and expiration date?

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 this strategy?

Correct AnswerverifiedShow Answer

Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free rate of 2.40 percent, standard deviation of 57 percent, and a d₁ value of .27167. What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Correct AnswerverifiedShow Answer

Purely financial mergers:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The primary purpose of a protective put is to:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

All of the following affect the value of a call option except the:

Correct AnswerverifiedShow Answer

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