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Exam 22: Options and Corporate Finance

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Question 1

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You can realize the same value as that derived from share 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 share and also lend out funds at the risk-free rate.
C) sell a put and buy a call on a share 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 share.
E) borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.

F) D) and E)
G) B) and E)

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Question 2

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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 share.
E) compute the value of an equivalent call and then multiply that value by e^-RT.

F) A) and B)
G) A) and C)

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Question 3

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What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.

The intrinsic value of a put is equal to the:

The assets of Blue Light Specials are currently worth €2,100.These assets are expected to be worth either €1,800 or €2,300 one year from now.The company has a pure discount bond outstanding with a €2,000 face value and a maturity date of one year.The risk-free rate is 5%.What is the value of the equity in this firm?

The delta of a call measures:

Three months ago,you purchased a put option on WXX with a strike price of €60 and an option price of €.60.The option expires today when the value of WXX is €62.50.Ignoring trading costs and taxes,what is your total profit or loss on your investment?

The market price of ABC 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 share with a strike price of €25 and an option price of €1.30.You also purchase a one-month put option on ABC 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 share price is €24.60 on the day the options expire?

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.

Given the following information,what is the value of d₂ as it is used in the Black-Scholes Option Pricing Model? Share price €42 Time to expiration .25 Risk-free rate .055 Standard deviation .50 D₁ .375161

Which of the following is not true concerning call option writers?

You own a call option on Jasper Co.that expires in one year.The exercise price is €42.50.The current price of the share is €56.00 and the risk-free rate of return is 3.5%.Assume that the option will finish in the money.What is the current value of the call option?

The current market value of the assets of Bigelow.is €86 million,with a standard deviation of 15% per year.The firm has zero-coupon bonds outstanding with a total face value of €45 million.These bonds mature in 2 years.The risk-free rate is 4% per year compounded continuously.What is the value of d₁?

You own one call option with an exercise price of €30 on Nadia Interiors.This is currently selling for €27.80 a share but is expected to increase to either €28 or €34 a share over the next year.The risk-free rate of return is 5% and the inflation rate is 3%.What is the current value of your option if it expires in one year?

If a call has a positive intrinsic value at expiration the call is said to be:

Tele-Tech Com announces a major expansion into Internet services.This announcement causes the price of Tele-Tech Com share to increase,but also causes an increase in price volatility of the share. Which of the following correctly identifies the impact of these changes on the call option of Tele-Tech Com?

Suppose you look in the newspaper and see ABC trading at €50 per share.Calls on ABC with one month to expiration and an exercise price of €45 are trading at €6.50 each.Puts on ABC with one month to expiration and an exercise price of €55 are trading at €3.50 each.Are these prices reasonable? Explain.(Ignore transactions costs.)

Several rumours concerning Wyslow have started circulating.These rumours are causing the market price of the share to be quite volatile.Given this situation,you decide to buy both a one-month put and a call option on this share with an exercise price of €15.You purchased the call at a quoted price of €.20 and the put at a price of €2.10.What will be your total profit or loss on these option positions if the share price is €4 on the day the options expire?

You wrote ten call option contracts on JIG 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?

Tru-U is selling for €36 a share.A 3-month call on Tru-U with a strike price of €40 is priced at €1.Risk-free assets are currently returning 0.25% per month.What is the price of a 3-month put on Tru-U with a strike price of €40?