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Corporate Finance Study Set 2

Business

Quiz 8 :

Financial Options and Applications in Corporate Finance

Quiz 8 :

Financial Options and Applications in Corporate Finance

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If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price.If the stock price is below the strike price, the exercise value of the call option is zero.
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True False
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Answer:

True

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Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.
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True False
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Answer:

False

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If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
Free
True False
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Answer:

False

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The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
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Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?
Multiple Choice
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BLW Corporation is considering the terms to be set on the options it plans to issue to its executives.Which of the following actions would decrease the value of the options, other things held constant?
Multiple Choice
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Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
Multiple Choice
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Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?
Multiple Choice
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Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?
Multiple Choice
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Which of the following statements is CORRECT?
Multiple Choice
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An option that gives the holder the right to sell a stock at a specified price at some future time is
Multiple Choice
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Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the
Multiple Choice
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Which of the following statements is CORRECT?
Multiple Choice
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As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.
True False
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Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?
Multiple Choice
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The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
True False
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An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.
True False
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Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
True False
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If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.
True False
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An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
Multiple Choice
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