Question 1

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) None of the above
G) C) and E)

Question 2

You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

Accepted Answer

A)  $6,000.00
B)  $6,048.50
C)  $6,179.25
D)  $6,202.22
E)  $6,415.69F) C) and D)
G) D) and E)

Question 3

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

Question 4

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?   Stock price $52.90 Risk-free rate 4.5 percent  3-month 45 call $9.31\begin{array} { l l } 	ext { Stock price } & \$ 52.90 \	ext { Risk-free rate } & 4.5 	ext { percent } \	ext { 3-month } 45 	ext { call } & \$ 9.31\end{array} Stock price  Risk-free rate  3-month 45 call ​$52.904.5 percent $9.31​

Accepted Answer

A)  $0.57
B)  $0.63
C)  $0.91
D)  $1.36
E)  $1.54 F) None of the above
G) C) and D)

Question 5

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) B) and E)
G) A) and B)

Question 6

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

Accepted Answer

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

Question 7

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 and increases the value of the firm's equity.F) B) and C)
G) A) and D)

Question 8

Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Accepted Answer

A)  3.95 percent
B)  4.21 percent
C)  4.67 percent
D)  5.38 percent
E)  5.57 percentF) D) and E)
G) All of the above

Question 9

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) None of the above
G) B) and D)

Question 10

Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

Accepted Answer

A)  sell a put option on BAT stock and invest at the risk-free rate of return
B)  buy both a call option and a put option on BAT stock and also lend out funds at the risk-free rate
C)  sell a put and buy a call on BAT 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 BAT stock
E)  borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options on BAT stockF) A) and B)
G) C) and E)

Question 11

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Accepted Answer

A)  American delta
B)  American call
C)  American put
D)  European put
E)  European callF) C) and E)
G) C) and D)

Question 12

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Accepted Answer

A)  annual
B)  daily
C)  quarterly
D)  monthly
E)  continuousF) All of the above
G) D) and E)

Question 13

Under European put-call parity,the present value of the strike price is equivalent to:

Accepted Answer

A)  the current value of the stock minus the call premium.
B)  the market value of the stock plus the put premium.
C)  the present value of a government coupon bond with a face value equal to the strike price.
D)  a U.S.Treasury bill with a face value equal to the strike price.
E)  a risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.F) C) and D)
G) All of the above

Question 14

The current market value of the assets of Smethwell,Inc.is $54 million,with a standard deviation of 16 percent per year.The firm has zero-coupon bonds outstanding with a total face value of $40 million.These bonds mature in 2 years.The risk-free rate is 4 percent per year compounded continuously.What is the value of d1?

Accepted Answer

A)  1.32
B)  1.48
C)  1.67
D)  1.79
E)  2.06F) A) and C)
G) None of the above

Question 15

To compute the value of a put using the Black-Scholes option pricing model,you:

Accepted Answer

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.F) None of the above
G) B) and D)

Question 16

Today,you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46.What is the most you can lose on these purchases over the next year?

Accepted Answer

A)  -$1.85
B)  -$0.31
C)  $0
D)  $0.42
E)  $1.54F) C) and D)
G) All of the above

Question 17

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Accepted Answer

A)  theta
B)  vega
C)  rho
D)  delta
E)  gammaF) C) and D)
G) A) and C)

Question 18

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 E)
G) B) and D)

Question 19

This morning,Krystal purchased shares of Global Markets stock at a cost of $39.40 per share.She simultaneously purchased puts on Global Markets stock at a cost of $1.50 per share and a strike price of $40 per share.The put expires in one year.How much profit will she earn per share on these transactions if the stock is worth $38 a share one year from now?

Accepted Answer

A)  -$2.65
B)  -$1.25
C)  -$0.90
D)  $0.60
E)  $1.25F) B) and C)
G) A) and B)

Question 20

Which one of the following statements is correct?

Accepted Answer

A)  Mergers benefit shareholders but not creditors.
B)  Positive NPV projects will automatically benefit both creditors and shareholders.
C)  Shareholders might prefer a negative NPV project over a positive NPV project.
D)  Creditors prefer negative NPV projects while shareholders prefer positive NPV projects.
E)  Mergers rarely affect bondholders.F) A) and E)
G) A) and D)

Exam 25: Option Valuation

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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Under European put-call parity,the present value of the strike price is equivalent to:

Correct Answer
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Which one of the following defines the relationship between the value of an option and the option's time to expiration?

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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Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Correct Answer
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Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

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

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

Correct Answer
verified

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Correct Answer
verified

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
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You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A purely financial merger:

Correct Answer
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To compute the value of a put using the Black-Scholes option pricing model,you:

Correct Answer
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Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Correct Answer
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Which one of the following statements is correct?

Correct Answer
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Exam 25: Option Valuation

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

Under European put-call parity,the present value of the strike price is equivalent to:

Correct AnswerverifiedShow Answer

Which one of the following defines the relationship between the value of an option and the option's time to expiration?

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

Cell Tower stock has a current market price of $62 a share.The one-year call on Cell Tower stock with a strike price of $65 is priced at $7.16 while the one-year put with a strike price of $65 is priced at $7.69.What is the risk-free rate of return?

Correct AnswerverifiedShow Answer

Which one of the following will provide you with the same value that you would have if you just purchased BAT stock?

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

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

Correct AnswerverifiedShow Answer

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Correct AnswerverifiedShow Answer

Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,2012.Which one of the following did Amy purchase?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You need $12,000 in 6 years.How much will you need to deposit today if you can earn 11 percent per year,compounded continuously? Assume this is the only deposit you make.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A purely financial merger:

Correct AnswerverifiedShow Answer

To compute the value of a put using the Black-Scholes option pricing model,you:

Correct AnswerverifiedShow Answer

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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