A) $5.06
B) $5.62
C) $6.24
D) $6.94
E) $7.63
G) A) and B)
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A) Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.
B) Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, but it doesn't make much sense for most other firms.
C) Companies with volatile earnings pay more taxes than companies with more stable earnings due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings.
D) Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress.
E) Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.
G) All of the above
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A) A situation in which aggregate risk can be reduced by derivatives transactions between two parties.
B) A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
C) Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken.
D) Two parties agree to exchange obligations to make specified payment streams.
E) Simultaneously buying and selling a call option with the same exercise price.
G) None of the above
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A) Buying inverse floaters.
B) Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
C) Purchase principal only (PO) strips that decline in value whenever interest rates rise.
D) Enter into a short hedge where the bank agrees to sell interest rate futures.
E) Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
G) A) and C)
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B) False
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A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
G) A) and B)
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A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
G) A) and E)
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A) $2.62
B) $2.92
C) $3.24
D) $3.60
E) $4.00
G) B) and E)
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A) The longer the time until the call option expires the smaller its value and the smaller its premium.
B) An option on an extremely volatile stock is worth less than one on a very stable stock.
C) The price of a call option increases as the risk-free rate increases.
D) Two call options on the same stock will have the same value even if they have different strike prices.
E) If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.
G) A) and C)
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A) 5.27%
B) 5.53%
C) 5.80%
D) 6.10%
E) 6.40%
G) C) and D)
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A) Put options give investors the right to buy a stock at a certain exercise price before a specified date.
B) Call options give investors the right to sell a stock at a certain exercise price before a specified date.
C) Options typically sell for less than their exercise value.
D) LEAPS are very short-term options that have begun trading on the exchanges in recent years.
E) Option holders are not entitled to receive dividends unless they choose to exercise their option.
G) C) and D)
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A) $4.41
B) $4.90
C) $5.39
D) $5.93
E) $6.52
G) A) and B)
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B) False
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A) An option's value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can't sell for more than its exercise value.
B) As a stock's price increases, the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases.
C) If the company is consistently profitable, its call options will always be in the money.
D) The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price.
E) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.
G) All of the above
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A) 4.74%
B) 4.99%
C) 5.25%
D) 5.53%
E) 5.81%
G) A) and B)
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